Image: BigstockThe Zacks Paper and Related Products industry is set to benefit from increased packaging needs, driven by rising e-commerce activities. Sustained demand from consumer-oriented sectors, such as food, beverages, and healthcare, lends further support. The industry’s growth is propelled by the escalating consumer inclination toward paper as an environmentally friendly packaging choice amid rising environmental awareness.Key players, such as Stora Enso Oyj (SEOAY – Free Report), Klabin S.A. (KLBAY – Free Report), Sylvamo (SLVM – Free Report), and Rayonier Advanced Materials (RYAM – Free Report), are well-positioned to capitalize on these trends as they continue to position themselves favorably in the evolving market landscape.
About the Industry
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, as well as 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. Industry players meet customers’ shipping, storage, and display requirements with sustainable solutions.
Major Trends Shaping the Future of the Paper and Related Products Industry
E-commerce & Consumer Products to Support Packaging Demand: The industry’s significant exposure to consumer-focused markets, such as food, beverages, and healthcare, ensures steady earnings growth. With the rise of e-commerce, packaging has gained the utmost importance, as it helps maintain the integrity of the product and withstand the complexities of delivery.According to Statista, global e-commerce sales were $5.8 trillion in 2023, and this figure is expected to reach $8 trillion by 2027, seeing a CAGR of 8.4%. This presents a major growth opportunity for the Paper and Related Products industry. In 2022, e-commerce accounted for nearly 19% of retail sales worldwide, and this share is expected to increase to 25% by 2027.The United States is expected to lead the retail e-commerce development, witnessing a CAGR of 11.82% over 2024-2028. The current valuation of the U.S. e-commerce market is $843 billion and it is anticipated to surpass the $1-trillion mark in 2026. India and Mexico are expected to follow the suit, seeing a CAGR of 11.79% and 11.71%, respectively.Rise in M&A Activity to Transform the Paper and Packaging Landscape: Recently, there has been a surge in merger and acquisition activity within the industry as companies position themselves to seize growth opportunities, and enhance their packaging and sustainability offerings, among other strategic objectives.WestRock’s pending merger with Smurfit Kappa Group Plc will create one of the world’s largest paper and packaging companies with an unmatched geographic reach, spanning 42 countries. Given this scale and equipped with the two companies’ highly complementary portfolios and innovative sustainability capabilities, the merged entity is likely to be the global “Go-To ” packaging partner for companies and customers across the globe. International Paper (IP – Free Report) has entered an agreement to acquire the entire issued share capital of DS Smith, outbidding rival Mondi Plc. This marks a strategic move to strengthen its corrugated packaging business in Europe and prioritize sustainable packaging. Meanwhile, per reports, Suzano has approached International Paper about a potential all-cash offer.Sustainability Acts as the Key Driver: 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. Investment in breakthrough technologies will propel the demand for high-quality paper products.Pricing Actions, Improving Efficiency to Offset Cost Inflation: The industry is witnessing rising costs of transportation, chemical and fuel, and supply-chain headwinds. Therefore, industry players are increasingly focusing on pricing actions and cost reduction, and resorting to automation in manufacturing to boost productivity and efficiency.
The Zacks Industry Rank Indicates Bright Prospects
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 #12, which places it in the top 5% of the 252 Zacks industries.The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bullish prospects in the near-term. 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 Paper and Related Products stocks that investors can keep an eye on, it is worth looking at the industry’s stock-market performance and its valuation picture.
The Industry Versus the S&P 500 & Sector
The Paper and Related Products industry has outperformed the sector and the S&P 500 over the past year. The stocks in this industry have gained 41.9%, whereas the Basic Materials sector has moved up 10%. The S&P 500 has grown 26.3% in the said time frame.
One-Year Price Performance
Image Source: Zacks Investment Research
The Industry’s Current Valuation
On the basis of the trailing 12-month EV/EBITDA ratio, a commonly-used multiple for valuing Paper and Related Products companies, we can see that the industry has recently been seen trading at 8.61X compared with the S&P 500’s 14.00X and the Basic Material sector’s trailing 12-month EV/EBITDA of 11.73X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)
Image Source: Zacks Investment Research
Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)
Image Source: Zacks Investment ResearchOver the last five years, the industry traded as high as 11.25X, as low as 3.98X, and with the median being 7.02X.
4 Paper and Related Products Stocks to Watch – Sylvamo
Stronger order books, as well as higher pulp and paper prices, will likely aid this company’s top-line growth. The company has initiated a cost-reduction program called Project Horizon, which is focused on streamlining its organization and cost structures in an effort to make a leaner, stronger company.Sylvamo is on track to realize savings of at least $110 million by the end of 2024. Around $80 million of the target will come from operational improvements in its mills and supply chains, and the balance from the reduction in selling and administrative expenses.The company continues to lower its debt levels and maintains a strong financial position that enables it to invest in its business. It has a pipeline of more than $200 million of high-return capital projects, which will boost its earnings and cash flow profile. The company’s shares have gained 55% in the past year.Earnings estimates for Sylvamo’s fiscal 2024 have moved 7% north over the past 30 days. Memphis, TN-based Sylvamo has a trailing four-quarter earnings surprise of 24.3%, on average. The company sports a Zacks Rank #2 (Buy) rating at present.
Price & Consensus: SLVM
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Klabin
In the first quarter of 2024, this company achieved a total sales volume of around 922,000 tons, up 5% year-over-year. The paperboard segment made a significant contribution, with a 15% increase in volume sold, reflecting the ramp-up of Paper Machine 28. In September 2023, Klabin inaugurated the Puma II project, with R$12.9 billion invested in the installation of two paper machines — MP27 and MP28 — with a total annual production capacity of 910,000 tons of paper.The MP28 machine also marked Klabin’s debut in the white paperboard market, reinforcing the expansion of its product portfolio. In the corrugated cardboard segment, the company recorded a 5.6% increase in volume sold in the first quarter, in sync with the growth trend of the Brazilian corrugated cardboard market. Klabin recently began operations at its new corrugated cardboard packaging factory, Figueira Project, located in Piracicaba, São Paulo.The unit has an annual production capacity of 240 thousand tons per year and will allow Klabin to reach 1.2 million tons of corrugated cardboard conversion capacity per year. The company’s efforts to improve efficiency in its operations and lowering costs will also aid earnings. The company’s shares have gained 6% in the past year.The Zacks Consensus Estimate for the São Paulo, Brazil-based company’s fiscal 2024 earnings has moved up 61% over the past 30 days. The consensus estimate suggests year-over-year growth of 24.7%. Klabin currently carries a Zacks Rank #2 (Buy) rating.
Price & Consensus: KLBAY
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Rayonier Advanced Materials
In the High Purity Cellulose segment, average sales prices for cellulose specialties are expected to increase as the company prioritizes value over volume. Sales volumes will gain from the closure of a competitor’s plant and a modest increase in ethers sales. The company’s bioethanol facility in Tartas, France, became operational in the first quarter of 2024 and is expected to deliver $3-$4 million of EBITDA in 2024, growing to $8-$10 million beginning in 2025.The Paperboard segment is expected to benefit from stable prices and higher volumes, reflecting customer demand. In October 2023, the company announced that it was exploring the potential sale of its Paperboard and High-Yield Pulp assets located at its Temiscaming site. This will align its portfolio with its long-term growth strategy, and provide flexibility to pay down debt, reduce leverage, and minimize earnings volatility.The indefinite suspension of operations at the Temiscaming High Purity Cellulose plant, announced on April 29, 2024, is anticipated to mitigate the plant’s ongoing operating losses and high capital needs, thereby improving the company’s consolidated free cash flow. It is focused on lowering debt levels, and investing in high-return projects and acquisitions to drive growth.Earnings estimates for fiscal 2024 for Jacksonville, FL-based Rayonier Advanced Materials indicate year-over-year growth of 58%. Estimates have been unchanged over the past 30 days. Rayonier carries a Zacks Rank #3 (Hold) rating at present.
Price & Consensus: RYAM
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Stora Enso
This company’s sales were impacted in the first quarter of 2024 due to the political strike in Finland. Stora Enso anticipates a gradual recovery in market conditions in 2024, with increased demand for consumer boards, higher pulp demand, and higher prices. It initiated a profit improvement program in February 2024, which is progressing well.The annual profit improvement target has been increased to EUR 120 million from the initial EUR 80 million, driven by additional fixed cost reductions. The consumer board investment at the Oulu site in Finland is progressing on schedule. Production is expected to start in the first half of 2025, with the full capacity estimated to be reached during 2027.It will support the company’s long-term strategy to build market share in renewable and circular packaging solutions, which matter the most to its customers. The company plans to improve its cash flow through working capital management and intends to lower debt levels. The company’s shares have gained 8.8% in the past year.The Zacks Consensus Estimate for 2024 for the Helsinki, Finland-based company has moved up 2% in the past 30 days. The consensus estimate for Stora Enso indicates year-over-year growth of 159%. Stora Enso currently carries a Zacks Rank #3 (Hold) rating.
Price & Consensus: SEOAY
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