Chicago, IL – June 20, 2023 – Today, Zacks Equity Research discusses Suzano SUZ, Smurfit Kappa Group plc SMFKY, Veritiv Corporation VRTV, Sappi SPPJY and Rayonier Advanced Materials RYAM.
Industry: Paper and Related Products
Link: https://www.zacks.com/commentary/2109368/5-paper-and-related-products-stocks-to-escape-industry-weakness
Of late, the Zacks Paper and Related Products industry has been impacted by weak packaging demand as customer spending has been muted due to inflationary pressures. Nevertheless, increasing packaging requirements due to the rising trend in e-commerce activities and steady demand from consumer-oriented end markets, such as food and beverages and healthcare, will support the industry. The growing preference for paper as a sustainable and eco-friendly packaging option due to environmental concerns will act as a key driver for the industry.
Companies like Suzano, Smurfit Kappa Group plc, Veritiv Corporation, Sappi and Rayonier Advanced Materials are likely to gain from the abovementioned trends.
The Zacks Paper and Related Products industry comprises companies that manufacture and sell paper and paper products. The industry is highly diversified in terms of products, ranging from graphic paper and packaging paper to absorbent hygiene products. Graphic papers, which include printing and writing papers and newsprint, are utilized for communication purposes. The industry provides packaging solutions for liquid, food, pharmaceutical, beauty, household, commercial and industrial products. It also produces fluff and specialty pulps utilized in absorbent hygiene products, tissues and paper products. The industry caters to a wide array of industries, including food and beverage, farming, home and personal care, health, retail, e-commerce and transport. The industry players meet customers’ shipping, storage and display requirements with sustainable solutions.
Low Consumer Spending, High Costs Are Near-Term Woes: The current inflationary pressures have been impacting consumers, leading to the lower demand for goods. This has impacted packaging demand as consumer priorities have shifted toward non-discretionary goods and services. Customers have been trying to lower their elevated inventories, which has impacted packaging demand. The companies in the industry had to cut down production levels to align with customer demand. Moreover, the industry is witnessing rising costs of transportation, chemical and fuel and supply-chain headwinds. Thus, industry players are increasingly focusing on pricing actions and cost reduction and resorting to automation in manufacturing to boost productivity and efficiency.
Digitization Hurts Paper Demand: The transition to digital media has been eroding the graphic paper market for some time now. The same remains a persistent threat to the industry. Paperless communication, the increased use of email, less print advertising, more electronic billing and fewer catalogs dented graphic paper demand. Consequently, the industry is resorting to machine conversions into packaging and specialty papers. Paper consumption in schools, offices and businesses took a hit from pandemic-led shutdowns. However, the demand picked up on the reopening of schools and offices.
E-commerce & Consumer Products to Support Packaging Demand: The industry’s considerable exposure to consumer-oriented end markets, including food and beverages and healthcare, ensures steady growth in earnings. With e-commerce, packaging gained the utmost importance as it has to maintain the integrity of the product and be durable to withstand the complexity involved in delivering the product. Per Statista, global e-commerce revenues are projected to witness a CAGR of 11.2% from 2023 to 2027, representing a major growth opportunity for the industry. Brazil is expected to lead in retail e-commerce development, with a CAGR of 14.08% over the 2023-2027 period, closely followed by Argentina, Turkey and India with growth of 14.61%, 14.33% and 13.91%, respectively.
Sustainability Is the Key: The increasing demand for sustainable packaging options and eco-friendly packaging solutions will support the paper market in the days ahead. The paper industry has already begun incorporating recycled content into production methods. By maximizing recycling, the industry will be able to implement environmentally and economically sustainable production methods. Investments in breakthrough technologies will propel the demand for high-quality paper products.
The Zacks Paper and Related Products industry is a 12-stock group within the broader Basic Materials sector. The industry currently carries a Zacks Industry Rank #238, which places it in the bottom 5% of the 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. Year to date, the industry's earnings estimates for 2023 have moved down 24%, and the same for 2024 has gone down 40%.
Before we present a few Paper and Related Products stocks that investors can keep an eye on, it is worth looking at the industry’s stock-market performance and valuation picture.
The Paper and Related Products industry has underperformed the S&P 500 and the sector over the past year. The stocks in this industry have dropped 18.4%, while the Basic Materials sector has risen 5.9%. The S&P 500 composite has increased 19.4% during this time frame.
On the basis of the forward 12-month EV/EBITDA ratio, a commonly-used multiple for valuing Paper and Related Products companies, we see that the industry is currently trading at 9.9X compared with the S&P 500’s 11.49X and the Basic Material sector’s forward 12-month EV/EBITDA of 6.61X. This is shown in the charts below. Over the last five years, the industry has traded as high as 11.55X and as low as 5.00X, with the median being 9.44X.
Veritiv: The ongoing execution of its commercial strategy led to a record adjusted EBITDA margin of 6.9% in the first quarter of 2023 despite industry-wide destocking. Veritiv’s record-low net leverage ratio of 0.3, in combination with a strong free cash flow generation, provides the company with significant scope to drive growth. The sale of Veritiv Canada will help VRTV focus on its strategy to invest in high-growth, higher-margin businesses and geographies. A focus on e-commerce and growing sustainable offerings will aid growth. The stock has gained 9.5% in the past year.
Earnings estimates for Veritiv’s fiscal 2023 have moved 5% north over the past 60 days. Atlanta, GA-based VRTV has a trailing four-quarter earnings surprise of 14.3%, on average. It has a long-term estimated earnings growth of 15.6%. The company has a Zacks Rank #2 (Buy) currently.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Suzano: The company’s adjusted EBITDA reached a record in 2022 despite inflationary pressures. The paper and packaging business delivered a 50% improvement in EBITDA, driven by price hikes, and surpassed the R$3 billion mark for the first time in a year. In the first quarter of 2023, adjusted EBITDA improved 20% year over year. Operating cash generation marked a 21% increase from the first quarter of 2022. SUZ managed to lower its net debt/Adjusted EBITDA to 1.9X at the end of the first quarter of 2023 — the lowest level since the merger of Suzano Pulp and Paper and Fibria in 2019. This is impressive, considering the company’s largest investment cycle to date. Between January and March 2023, Suzano invested R$3.7 billion, R$1.9 billion of which has been allocated to the construction of a pulp mill in the municipality of Ribas do Rio Pardo, Mato Grosso do Sul state. Also, Suzano’s $2.8-billion Cerrado Project has been 57% completed and remains on schedule to commence production in the first quarter of 2024. Once completed, it is expected to boost SUZ’s current pulp production capacity by approximately 20%. It will be the world’s largest plant with a single eucalyptus pulp production line. The stock has risen 4.6% in the past year.
The Salvador, Brazil-based integrated pulp and paper producer, SUZ, has a trailing four-quarter earnings surprise of 54.8%, on average. The company has a long-term estimated earnings growth rate of 7% and currently carries a Zacks Rank #3 (Hold).
Smurfit Kappa: SMFKY’s results have been benefiting from its focus on bringing innovative and sustainable paper-based packaging to the market and customer-focused investments undertaken over the past few years, as well as strategic acquisitions. The company continues to expand its geographic footprint and product portfolio through acquisitions. Smurfit Kappa recently made a $12 million investment in its Tijuana plant for new machinery and process upgrades, which will significantly increase both printing quality and efficiency. The company has been increasing production capacity in Mexico by investing more than $350 million in the last five years. Mexico is the second largest economy in Latin America after Brazil. It is being considered as an ideal location for accessing the U.S. market. The demand for sustainable and innovative packaging solutions remains strong. The company has also been investing in the latest high-tech and energy-efficient machinery, which will boost production while reducing its environmental footprint and expanding its range of high-value, innovative and sustainable packaging solution offerings. The company’s shares have risen 7% in the past year.
The Dublin, Ireland-based company has a long-term estimated earnings growth of 6.3% and a Zacks Rank #3 at present.
Sappi: The Viscose staple fiber and dissolving pulp markets are recovering, and the demand from the company’s major customers remains healthy. The company is diligently managing working capital through production curtailments and adapting its product and market mix to match demand. The company is progressing well in its Thrive25 strategic program. This entails focusing on growing its business dissolving pulp capacity, expanding packaging and specialty papers in all regions while reducing exposure to graphic paper markets. It is also focusing on maintaining financial health and progressing toward attaining a net debt target of approximately $1 billion. It is striving to drive operational excellence by improving its cost position and production efficiencies. The company’s shares have declined 29.4% in a year but are expected to trend up, backed by these abovementioned tailwinds.
Johannesburg, South Africa-based Sappi has a trailing four-quarter earnings surprise of 31%, on average. It has a long-term estimated earnings growth of 26%. The company carries a Zacks Rank #3.
Rayonier Advanced Materials: Despite witnessing some softness in some parts of its business lately, the company has been able to manage to offset the impact through its focus on improving operational efficiency and reducing costs. Sales volumes have been up 7% since 2021. The company is progressing well with its working capital initiatives and has reduced net debt leverage to 3.3X. This has been possible through EBITDA expansion. The company plans to take it to 2.5X in three to five years. RYAM’s ongoing strategic investments are expected to drive EBITDA growth. The Jesup debottlenecking is expected to boost EBITDA, starting in the back half of this year. The Tartas Bioethanol plant is expected to be complete and contribute to EBITDA in the second half of 2024. It is focused on investing in high-return projects and acquisitions to drive growth. The company’s shares have rallied 56% in the past year.
Jacksonville, FL-based Rayonier Advanced Materials has a trailing four-quarter earnings surprise of 49%, on average. The company carries a Zacks Rank #3.
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Veritiv Corporation (VRTV) : Free Stock Analysis Report
Sappi Ltd. (SPPJY) : Free Stock Analysis Report
Rayonier Advanced Materials Inc. (RYAM) : Free Stock Analysis Report
Smurfit Kappa (SMFKY) : Free Stock Analysis Report
Suzano S.A. Sponsored ADR (SUZ) : Free Stock Analysis Report
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