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Why Is WestRock (WRK) Down 8.3% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for WestRock (WRK). Shares have lost about 8.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is WestRock due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

WestRock Earnings Beat, Sales Miss Estimates in Q3

WestRock delivered third-quarter fiscal 2019 (ended Jun 30, 2019) adjusted earnings of $1.11 per share, surpassing the Zacks Consensus Estimate of $1.02. Moreover, earnings improved 2% over the prior-year quarter figure of $1.09.
 
Including one-time items, the company reported earnings per share of 98 cents in the reported quarter, down 5% from the prior-year quarter’s $1.03.

Operational Update
 
WestRock’s total revenues jumped 13% year over year to $4,690 million. However, the top line missed the Zacks Consensus Estimate of $4,866 million.

The year-over-year improvement in total sales can primarily be attributed to increased sales in Corrugated Packaging segment, aided by the KapStone acquisition, and higher selling prices for domestic containerboard and corrugated containers, partially offset by declining export prices. However, the absence of recycling sales in the current-year quarter, lower containerboard volumes and unfavorable foreign currency impact had a deterring effect. Moreover, sales were lower in the Consumer Packaging and Land Development segments.

Cost of sales improved 13.2%, year over year, to $3,701 million in the fiscal third quarter. Gross profit advanced 14% year over year to $989 million. Gross margin came in at 21.1% compared with 21.0% in the prior-year period. Adjusted segment EBITDA was $857.5 million compared with $753.5 million reported in the prior-year quarter.

Total segment income came in at $485 million, up from $458 million witnessed in the year-ago quarter. This upside was driven by increase in Corrugated Packaging segment income, which was somewhat offset by decline in both Land and Development and Consumer Packaging segments’ income. Benefits from Contribution from acquired operations, higher selling price/mix across segments and productivity improvements were offset by lower volumes across segments, economic downtime, cost inflation, increased maintenance and scheduled strategic outage expense.

Segment Performance

Corrugated Packaging: Sales in the segment improved 26% year over year to $3,073 million in the reported quarter. Adjusted segment EBITDA jumped 28.4% year over year to $644 million. Segment income came in at $392.7 million in the quarter, reflecting year-over-year growth of 22%.

Consumer Packaging: Sales in this segment declined 1% year over year to $1,650 million from the year-ago quarter. Adjusted segment EBITDA was down 11% year over year to $233 million. Segment income was $91 million in the June-end quarter compared with the prior-year quarter’s $126.1 million.

Land and Development: The segment’s sales came in at around $9 million compared with year-earlier quarter’s figure of $64.8 million. Notably, WestRock has excluded the results of the segment from adjusted earnings per share.

Financial Position

As of Jun 30, 2019, cash and cash equivalents were $179 million, significantly down from $636.8 million as of Sep 30, 2018. As of quarter end, total debt was $10.5 billion, up from $6.4 billion as of fiscal 2018 end. Cash flow from operations came in at $735 million in the third quarter of fiscal 2019 compared with $662 million in the prior-year quarter.
 
WestRock invested $351 million in capital expenditures and paid out $117 million in dividends.

On Nov 2, 2018, WestRock completed the acquisition of rival KapStone Paper and Packaging Corporation. The company anticipates achieving approximately $200 million in synergies and performance improvements by the end of fiscal 2021 through the integration of the former KapStone operations into WestRock’s corrugated business. The company achieved $80 million of run-rate synergies of its $200 million target. WestRock is also focusing on productivity, operational excellence and debt reduction, while returning cash to shareholders.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, WestRock has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, WestRock has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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