The Zacks Containers – Paper and Packaging industry is benefiting from robust demand for food, beverage and hygiene products triggered by the coronavirus pandemic as packaging is integral to the distribution of these products. The industry is also gaining from the booming e-commerce activities as customers prefer staying indoors. Further, rising demand for sustainable and eco-friendly packaging options due to increasing environmental concerns will keep driving growth for the industry.
Companies like Amcor plc (AMCR – Free Report) , Packaging Corporation of America (PKG – Free Report) , Sealed Air Corporation (SEE – Free Report) , Berry Global Group, Inc. (BERY – Free Report) and Greif, Inc. (GEF – Free Report) are poised well to benefit from these trends.
About the Industry
The Zacks Containers – Paper and Packaging industry comprises companies that manufacture paper and plastic packaging products. The packaging solutions provided by the industry helps protect and preserve products while also extending shelf life and cutting down wastage across the wide range of distribution channels. The industry players’ products range from containerboard and corrugated packaging to flexible and rigid plastic packaging. Some companies also manufacture dispensing pumps, closures, aerosol valves and applicators for the beauty, personal, home care and healthcare markets. The industry serves a wide array of markets, including food, beverage, food services and other consumer products, such as beauty, personal care and home care. They also cater to the chemical, agribusiness, medical, pharmaceutical, electronics and industrial markets, to name a few.
What’s Shaping the Future of the Containers – Paper and Packaging Industry
Rising Demand for Essential Products & E-commerce: The industry has a considerable exposure (more than 60%) to consumer-oriented end-markets, such as food and beverages, and healthcare, which keeps demand for packaging applications fairly stable across economic cycles. Moreover, the pandemic has triggered requirement for essential products, such as food, medicine, medical equipment and other critical products, which in turn has spurred demand for industry’s packaging solutions since last year. With rising e-commerce activities over the past few years and the pandemic further accelerating it, the importance of packaging has increased manifold as it helps maintain the integrity and durability of a product to withstand the complex product-delivery process. According to Statista, the global e-commerce market is projected to grow to $5.4 trillion from $4.28 trillion in 2020, which will continue supporting the industry.
Focus on Eco-Friendly Packaging: Demand for sophisticated packaging has been on the rise, and the industry is constantly striving to meet the same by adopting new technology and innovative products. It is also likely to gain from the growing global demand for environment-friendly biodegradable packaging materials, courtesy of customers’ increasing awareness about environmental issues. Industry players have already begun incorporating recycled content into production methods. By maximizing recycling, the industry will be able to implement environmentally- and economically-sustainable production methods. Notably, Amcor is the first packaging company to have pledged to develop all its packaging to be recyclable or reusable by 2025.
Impact of Pandemic Persists, Costs Remain High: Even though the food and beverage markets are rapidly growing across the globe, parts of these markets, including food services and restaurants, have been affected significantly by the pandemic. Closures of food outlets have thwarted demand for food-grade paper packaging products. The industry players, which cater to the healthcare markets, are also being impacted by fewer elective surgeries and lower prescription trends on account of the COVID-19 pandemic. Companies that make dispensing systems for prestige beauty products have also been impacted due to low demand amid the pandemic. Meanwhile, the industry is also facing rising raw-material costs, and higher labor, transportation and chemical costs. Resin supply market is tight and prices are expected to increase in the near term. Old corrugated container costs are also considerably higher than the last year. Therefore, these companies are now focusing on reducing costs and improving productivity to boost margins.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Containers – Paper and Packaging industry is 13-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #53, which places it at the top 21% of the 254 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright 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.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. So far this year, the industry’s earnings estimates for the current year have been revised upward by 7%.
Before we present a few Containers – Paper and Packaging stocks that can be retained in one’s portfolio, it’s worth taking a look at the industry’s stock-market performance and valuation picture.
Industry Underperforms S&P 500 & Sector
The Containers – Paper and Packaging industry has underperformed the S&P 500 and the sector over the past year. The stocks in this industry have gained 34.8% compared with the S&P 500’s rally of 39%. Meanwhile, the Industrial Products sector has appreciated 50.1%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly-used multiple for valuing Containers – Paper and Packaging companies, we see that the industry is currently trading at 20.88x compared with the S&P 500’s 15.89x and the Industrial Products sector’s forward 12-month EV/EBITDA of 20.42x. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Over the last five years, the industry has traded as high as 29.86x and as low as 10.80x, with the median at 14.61x.
5 Containers – Paper and Packaging Stocks to Keep a Close Eye On
Greif: Delaware, OH based Greif produces and sells industrial packaging products and services worldwide. The company has been witnessing improvement in many of its key end markets, which is expected to aid results this year. Greif’s restructuring activities, which include optimizing and integrating operations in the Paper Packaging & Services segment, rationalizing operations and closing underperforming assets in the Global Industrial Packaging segment, will also lead to savings in the days ahead. Greif will continue to benefit from focus on operational execution, capital discipline, and a strong and diverse product portfolio. The Caraustar buyout also positions the company well for growth.
The Zacks Consensus Estimate for the company’s ongoing-year earnings has gone up 30.8% in the past 90 days. It has a trailing four-quarter earnings surprise of 6%, on average. The company has an estimated long-term earnings growth rate of 10%. The stock has gained 16% in the past six months. It currently sports a Zacks Rank #1 (Strong Buy).
Price & Consensus: GEF
Packaging Corporation of America: Based in Lake Forest, IL, Packaging Corporation manufactures and sells containerboard and corrugated packaging products in the United States. The company’s packaging business, which accounts for around 89% of its revenues, is gaining from elevated demand for meat, fruit and vegetables, processed food, beverages, medicine, and other consumer products in the wake of the pandemic, which in turn fueled demand for its corrugated products packaging. Further, it is poised to gain from the e-commerce boom. The company maintains a balanced approach toward capital allocation in order to boost growth and maximize returns for shareholders.
The Zacks Consensus Estimate for the company’s ongoing-year earnings has been revised upward by 11% in the past 90 days. It has a Zacks Rank of 2 (Buy) and a trailing four-quarter earnings surprise of 9.33%, on average. The company has an estimated long-term earnings growth rate of 5%.
Price & Consensus: PKG
Berry Global Group: This Evansville, IN-based company manufactures and distributes non-woven specialty materials, engineered materials and consumer packaging products. It also serves personal care, healthcare as well as beverage and food markets. The company is likely to gain from soaring demand across the grocery, healthcare and consumer-centric end markets. Furthermore, the RPC Group buyout has been opening up growth opportunities in the plastic and recycled packaging industry. Improving operational productivity and cost-reduction actions will fuel its near-term performance. Also, the company’s utilizes its cash flow in investing in organic growth, acquisitions, repaying debts and repurchasing shares.
The Zacks Consensus Estimate for the company’s fiscal 2021 earnings has moved north by 7.7% in the past 90 days. The stock has appreciated 22% over the past six months. The company has a trailing four-quarter earnings surprise of 24.7%, on average. The company currently has a Zacks Rank #2 and an estimated long-term earnings growth rate of 10%.
Price & Consensus: BERY
Amcor: Based in Zurich, Switzerland, Amcor develops, manufactures, and sells various packaging products for food, beverage, pharmaceutical, medical, home and personal care and other consumer goods end markets worldwide. The company has been witnessing solid demand across a broad range of end markets. Backed by its strong balance sheet and annual free cash flow in excess of $1 billion, Amcor continues to invest in growth, expand capacity in higher value segments and growth markets. It will also benefit from cost discipline and synergies related to the Bemis acquisition. Focus on innovation and sustainable packaging will also contribute to growth. It is on track to fulfill its obligation to develop all of the company’s packaging to be recyclable by 2025.
The Zacks Consensus Estimate for the company’s fiscal 2021 earnings has moved 2.5% north over the past 90 days. The company currently carries a Zacks Rank of 3 (Hold). It has a trailing four-quarter earnings surprise of 2.3%, on average. The company has an estimated long-term earnings growth rate of 9.5%.
Price & Consensus: AMCR
Sealed Air: Based in Charlotte, NC, Sealed Air is a global leader in food safety and security and product protection. The company’s top-line performance is likely to benefit from demand for packaging for essential goods and e-commerce amid the global health crisis. In addition, Sealed Air has been making steady progress on its reformation plan — Reinvent SEE Strategy — focused on stoking bottom-line growth. Apart from this, it is anticipated to benefit from acquisitions, cost reductions, driving operational excellence and new innovations.
The Zacks Consensus Estimate for the company’s 2021 earnings has been revised upward by 4% over the past days. The company’s shares have rallied 26% over the past six months. It has a trailing four-quarter earnings surprise of 21.4%, on average. The company has a Zacks Rank #3 and an estimated long-term earnings growth rate of 8.3%.
Price & Consensus: SEE
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