On Nov 10, we issued an updated research report on
WestRock Company
WRK
. The company is gaining from the solid demand for corrugated packaging, containerboard as well as food and beverage consumer packaging in the wake of the coronavirus pandemic. Further, the e-commerce boom and acquisitions will drive growth. However, waning demand across some of WestRock’s businesses and higher input costs are concerns.
Packaging Demand to Spur Growth
Packaging products are essential for the distribution of food, beverage and pharmaceutical products. Hence, WestRock’s Consumer Packaging segment is gaining from sustainable paper and packaging options as well as significant demand in food, food service, and beverage packaging categories owing to the pandemic. Notably, this category represents 80% of the segment’s revenues. Further, the company will benefit from the e-commerce boom that will fuel demand for boxes. WestRock’s corrugated packaging business is benefiting from improved box shipment, as well as increased demand from distribution, industrial and agricultural customers as the economy gradually recovers.
Capital Projects to Aid Growth
WestRock has been witnessing robust demand for containerboard and corrugated packaging in Brazil. It is well poised to capitalize on this growth in the region, with the ramp-up of the Porto Feliz box plant and the completion of the TresBarras project in the first half of fiscal 2021. The company will also reap the benefits of strategic capital projects in its mill and converting systems in the near term. Once completed, these projects are expected to contribute to the company’s EBITDA.
WestRock estimates capital expenditures for fiscal 2021 between $800 million and $900 million. Earlier, WestRock had announced that it is reconfiguring its North Charleston, SC, paper mill to boost the mill’s long-term competitiveness. The move is expected to increase the company’s annual EBITDA, primarily owing to the reduction in operating costs from the shutdown of the paper machine and its associated infrastructure.
Acquisitions to Aid Growth
WestRock acquired KapStone Paper and Packaging Corp in 2019, with the integration on track. The acquisition has helped the company cement its presence in the Western United States. Further, KapStone’s corrugated packaging operations continue enhancing WestRock’s North American corrugated packaging business and provide complementary products. It also fast-tracks its target to improve margins of its North American corrugated packaging business. These moves are likely to aid the company. This apart, it is focused on reducing debt through its Pandemic Action Plan.
However, there are a few factors that are likely to hinder growth in the near term.
The pandemic has disrupted demand patterns across few of WestRock’s businesses. Demand in foodservices has been affected by uncertainty in the timing of the reopening of restaurants, schools and other services. Commercial print demand is also likely to be strained due to limited public events, and reduced retail and direct mail advertising. Luxury goods and industrial products have also been hit hard. This will prevail until the situation stabilizes. Further, resurgence of COVID-19 cases in many markets has given rise to uncertainties.
Moreover, WestRock anticipates normal seasonal sequential volume declines in many of its businesses, including merchandising displays, Victory Packaging business as well as food and beverage. The company expects higher natural gas and freight cost due to the upcoming winter months. This will impact its margins in first-quarter fiscal 2021. It is also bearing the brunt of soft specialty solid bleached sulfate (SBS) volumes due to declines in foodservice, commercial print and tobacco applications as well lower global pulp prices.
Price Performance
Shares of WestRock have gained 2.7% over the past year, as against the
industry
’s loss of 2.8%.
Zacks Rank & Stocks to Consider
WestRock currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the basic materials space are
Agnico Eagle Mines Limited
AEM
,
Newmont Corporation
NEM
and
Barrick Gold Corporation
GOLD
. While Agnico Eagle Mines and Newmont flaunt a Zacks Rank #1, Barrick Gold carries a Zacks Rank of 2 (Buy), at present. You can see
the complete list of today’s Zacks #1 Rank stocks here.
Agnico Eagle Mines Limited has an expected earnings growth rate of a whopping 103% for the current year. The company’s shares have rallied 38% over the past year.
Newmont has a projected earnings growth rate of 98% for 2020. The stock has gained 72% in a year’s time.
Barrick Gold has an estimated earnings growth rate of 99% for the ongoing year. Its shares have appreciated 67% in the past year.
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