Zacks Industry Outlook Highlights Graphic Packaging Holding, Sonoco Products and Greif

For Immediate Release

Chicago, IL – November 4, 2022 – Today, Zacks Equity Research discusses Graphic Packaging Holding Co. GPK, Sonoco Products Co. SON and Greif, Inc. GEF.

Industry: Packaging

Link: https://www.zacks.com/commentary/2013627/3-packaging-stocks-to-watch-amid-industry-challenges

The Zacks Containers – Paper and Packaging industry is currently facing the impact of the ongoing supply-chain disruptions and rising costs. Lower consumer spending amid an inflationary backdrop has decelerated demand of late. Nevertheless, the industry's demand will be supported by the rising e-commerce activities and solid demand for sustainable and eco-friendly packaging options due to increasing environmental concerns. Pricing actions implemented by the industry players will help them counter the impact of high costs.

Graphic Packaging Holding Co., Sonoco Products Co. and Greif, Inc. are set to gain from growth efforts.

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 help protect and preserve products, extend the shelf life and cut down on wastage and loss across the wide and lengthy range of distribution channels. The products range from containerboard and corrugated packaging to flexible and rigid plastic packaging.

Some companies 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

High Costs & Supply-Chain Woes Remain: The industry participants continue encountering supply-chain disruptions and higher raw material costs, stemming from various factors like general inflationary pressure, limited availability of certain raw materials, and global transportation disruptions. Higher labor, transportation and chemical costs aggravated their woes. Shortage of labor impacted their production levels and impaired their ability to meet high demand.

The companies have been implementing cost-reduction actions for a while, which are likely to help sustain margins. They focus on streamlining their operations and realigning with high-growth key markets to bolster their performances. Some companies recently witnessed a decline in volumes due to lower consumer spending on goods, given the inflationary scenario.

E-commerce Remains a Key Catalyst: With the rising e-commerce activities over the past few years and the pandemic accelerating it further, the importance of packaging increased manifold as it helps maintain the integrity and durability of a product to withstand the complex product-delivery process. Per Statista, global retail e-commerce sales amounting to$5.2 trillion in 2021 are expected to surge 56% to $8.1 trillion by 2026.

This, in turn, will fuel the Containers - Paper and Packaging industry. The industry has significant exposure (more than 60%) to consumer-oriented end markets, such as food and beverages and healthcare, keeping demand for packaging applications fairly stable across economic cycles.

Focus on Eco-Friendly Packaging Intensifies: Demand for environmentally-friendly biodegradable packaging materials sees a steady rise globally, courtesy of customers' increasing awareness of environmental issues. The industry is constantly striving to meet the same by adopting new technology and bringing innovative products. Industry players already began incorporating recycled content into production methods. By maximizing recycling, the industry can implement environmentally and economically-sustainable production methods.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Containers - Paper and Packaging industry is a 10-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #202, which places it at the bottom 19% of the 250 Zacks industries.

Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few Containers - Paper and Packaging stocks that you may want to consider for your portfolio, let's look at the industry's recent stock-market performance and the valuation picture.

Industry Versus Broader Market

The Containers - Paper and Packaging industry has outperformed the S&P 500 and the sector over the past year. The industry has fallen 11% compared with the S&P 500's decrease of 18.9% and the Industrial Products sector's decline of 16.6%.

Industry's Current Valuation

On the basis of the trailing 12-month EV/EBITDA ratio, a commonly used multiple for valuing Containers - Paper and Packaging companies, we see that the industry is currently trading at 16.16X compared with the S&P 500's 11.44X and the Industrial Products sector's trailing12-month EV/EBITDA of 17.34X.

Over the last five years, the industry traded as high as 28.54X and as low as 13.35X, with the median at 19.03X.

3 Containers - Paper and Packaging Stocks to Keep an Eye On

Graphic Packaging:  GPK has been capturing new business opportunities, supported by consumer preference for sustainable, fiber-based packaging solutions. Innovation and more circular consumer-packaging solutions are consistently driving its organic sales growth. GEF's shares have appreciated 3.5% in the past three months.

Production ramp-up at the new K2 Coated Recycled Paperboard (CRB) machine in Kalamazoo, MI, is on track. It will significantly improve water and energy usage, and enable GPK to be the lowest-cost producer of the high-quality coated recycled board in North America. It is expected to contribute $50 million to incremental EBITDA this year and $130 million to incremental EBITDA over three years. Graphic Packaging has been executing price actions for a while, thus aiding in offsetting commodity input cost inflation.

The Zacks Consensus Estimate for this Atlanta, GA-based player's fiscal 2022 earnings has moved up 3.6% over the past 30 days. The figure indicates growth of 87% from the last fiscal year's reading. Graphic Packaging has an estimated long-term earnings growth rate of 25% and a Zacks Rank #2 (Buy) at present. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Sonoco: SON's consumer packaging businesses are primarily benefiting from the Metal Packaging acquisition. Sonoco successfully completed the initial start-up of its advanced #10 URB machine in the Hartsville Mill Complex, which will improve its paper-making efficiency. SON's planned acquisition of Skjern Paper in Denmark will help it meet growing demand for sustainable paper-based packaging in Europe.

Its focus on optimizing businesses through productivity improvement, standardization and cost control will drive results in the near term. It is focused on increasing investment in its core consumer and industrial businesses and achieving an annual EBITDA of $1 billion by 2026. Shares of SON have declined 8% over the past three months.

The Zacks Consensus Estimate for Sonoco's fiscal 2022 earnings has moved 0.3% north in the past 30 days. The figure indicates growth of 79% from the last fiscal year's reading. This Hartsville, SC-based player has a trailing four-quarter earnings surprise of 6.2%, on average. The stock currently has a Zacks Rank #3 (Hold) and an estimated long-term growth rate of 5%.

Greif: GEF's Global Industrial Packaging segment has been gaining from the strong key end markets for a while. Greif has been witnessing solid demand in its global resin-based portfolio with higher volumes witnessed in plastic drums and Intermediate Bulk Container (IBC), backed by the strategic growth investments in the United States and EMEA, and the ongoing recovery in the industrial-end markets.

The Paper Packaging segment continues benefiting from strong volumes in converting operations and higher selling prices owing to increased published containerboard and boxboard prices. GEF's shares have declined 4.6% over the past three months, mainly due to the ongoing supply-chain disruptions and higher energy, chemical and transportation costs, which will likely impact margins. Nevertheless, strong demand and pricing increases are likely to sustain its earnings performance. GEF continues to invest in the business, return excess cash to its shareholders through an attractive and growing dividend, and deleverage its balance sheet, which is commendable.

The Zacks Consensus Estimate for Greif's 2022 earnings has been revised 0.1% upward over the past 90 days. The earnings estimate for the year suggests growth of 43.2% from the year-ago reported figure. Greif has a trailing four-quarter earnings surprise of 22.4%, on average. The Delaware, OH-based player has an estimated long-term earnings growth rate of 10% and a Zacks Rank of 3.

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