Forget International Paper (IP), Buy These 3 Packaging Stocks for 2022
With International Paper (IP) grappling with supply-chain issues, inflated costs and unplanned mill outage, it is wise to avoid this stock and invest in packaging stocks BERY, GEF and VRTV...
Year 2021 will end on a sour note for International Paper IP. Investors earlier cheered its move to spin-off its Printing Papers segment, which will help the company capitalize on the growing demand for corrugated packaging. However, IP’s share price soon plunged on the weaker-than-expected third-quarter 2021 results and downbeat fourth-quarter guidance. This mainly resulted from supply-chain issues and cost pressures. International Paper’s woes were not over yet, as a structural failure at its Prattville paper mill led to an unplanned outage. On Dec 1, the company hiked its cost expectations again, and stated that inflated costs and the impact of the Prattville paper mill outage would likely have a $95-$105 million drag on fourth-quarter earnings. This dealt another blow to its share price.
International Paper’s overall run in 2021 so far is not something worth writing about. Its shares have declined 7.8% so far this year against its industry’s growth of 2.5% and S&P 500’s rally of 26.1%. Earnings estimates for 2021 and 2022 have decreased by 12% and 16%, respectively, over the past 60 days. This indicates bearish sentiments for this stock, as six estimates moved downward versus none upward.
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In such a scenario, it is prudent for near-term investors to avoid this Zacks Rank #4 (Sell) stock and instead focus on three packaging stocks — Berry Global Group BERY, Greif, Inc. GEF and Veritiv Corporation VRTV. These companies currently flaunt a Zacks Rank #1 (Strong Buy) and are expected to deliver solid growth in 2022.
Before discussing these stocks, let’s have a detailed look at what made International Paper fall out of favor with investors this year.
Higher-Than-Expected Costs in Q3: On the third-quarter conference call, management highlighted that input costs in the third quarter rose by 46 cents per share, more than double it had anticipated. Fiber and energy costs accounted for about 80% of this increase. Transportation costs remained elevated for both inbound materials and outbound shipments. Additionally, owing to labor market constraints, the company had to increase overtime and hire additional employees, leading to a spike in labor costs, particularly at its converting facilities.
Supply-Chain Issues Impact Volumes: The company stated that the widespread supply-chain constraints limited its ability to capture the full opportunity from the strong level of demand across all channels, including boxes, sheets and containerboard.
Tepid Guidance for Q4: On the third-quarter conference call, the company said that in the Industrial Packaging segment, maintenance outage expenses would increase by $3 million in the fourth quarter and input costs would increase by $50 million, mostly on higher costs for fiber and energy. In Global Cellulose Fibers, volume will likely be lower by $5 million primarily due to persistent port congestion. Maintenance outage expenses are expected to increase by $37 million and input costs are anticipated to increase by $15 million on higher wood and energy costs.
Prattville Outage to Lead to Lost Production: On Nov 6, the company announced that the Prattville paper mill in Alabama had to be shut down due to a failure of one of the mill’s stock tanks. The mill produces 1.1 million tons per year of linerboard. Operations have since resumed for Paper Machine Number 2. However, Paper Machine Number 1 along with the balance of the mill is expected to be fully operational early next year, with no clear timeline provided. International Paper did not quantify the anticipated production loss.
Hikes Cost Guidance: On Dec 1, during a presentation at the Citi 2021 Basic Materials Virtual Conference, International Paper’s management stated that the mill outage would likely impact fourth-quarter earnings by $60-$70 million. The company anticipates input costs to be $35 million higher than its earlier mentioned figure due to higher prices for wood fiber and energy.
Though the company plans to file insurance claims, it is unclear how much it may be able to recover. Also, since Paper Machine Number 1 is not likely to restart until early 2022, investors anticipate some impacts in the first quarter of 2022. Considering that the company has struggled in recent quarters due to insufficient containerboard inventory, this development could exacerbate the problem. It is perceived that International Paper will not be able to capitalize on the current strong demand, given the Prattville outage, existing supply-chain issues and labor shortage.
3 Solid Packaging Stocks Set for a Solid 2022
Greif: The company’s Global Industrial Packaging segment has been gaining from strong growth in Intermediate Bulk Container and large plastic drum in the past few quarters, backed by strategic growth investments in the United States and EMEA, and ongoing recovery in the industrial end markets. The Paper Packaging segment has been benefiting from strong volumes in converting operations and higher selling prices. Strong demand, focus on operational execution, and price increases to combat cost inflation will likely boost the fiscal 2022 results. Greif has reached a lower interest rate tier in its credit facility as a result of substantial debt repayments, which, in turn, will bolster its earnings in the forthcoming quarters. The Caraustar acquisition, ongoing investment in business and restructuring activities will also aid growth. The stock has gained 22.1% so far this year.
The Zacks Consensus Estimate for Greif’s fiscal 2022 earnings suggests year-over-year growth of 11.4%. The consensus mark has moved up 6% over the past 60 days. The company has a long-term estimated earnings growth rate of 10%. The leading world producer of industrial packaging products and services has a trailing four-quarter earnings surprise of 16.8%, on average.
Veritiv: The third quarter of 2021 marked the company’s tenth consecutive quarter of a year-over-year improvement in its Packaging segment’s adjusted EBITDA margin performance. Also, it was instrumental in driving the overall record earnings and adjusted EBITDA margin performance in the company history. Strong demand and disciplined pass-through of supplier-driven inflationary price increases continue to lead to sales growth across most of its segments. Expected benefits of the 2020 Restructuring Plan as well as commercial and supply-chain productivity are expected to boost earnings. The company’s net leverage ratio is a record-low at 1.5X, which is commendable. The company’s shares have surged 467% so far this year. Its well-diversified packaging business, focus on acquisitions in high-growth and high-margin sectors, and investment in technology and e-commerce are expected to drive long-term growth.
The Zacks Consensus Estimate for Veritiv’s fiscal 2022 earnings suggests year-over-year growth of 21%. The consensus mark has moved up 27% over the past 60 days. Veritiv is a business-to-business provider of value-added packaging products and services as well as facility solutions, print, and publishing products and services. The company has a trailing four-quarter earnings surprise of 1,707%, on average.
Berry Global: Demand across businesses, e-commerce, health, food safety and wellness is expected to be strong for the company in the quarters ahead. The Consumer Packaging — North America segment will likely benefit from strength in its consumer businesses across foodservice and beverage end markets. The Health, Hygiene & Specialties segment is likely to benefit from strength in the healthcare end market, recovery in the construction end market. Improvement in demand across food & beverage and foodservice end markets will drive the Consumer Packaging – International segment. The Engineered Materials segment is likely to gain from growth in demand for its protective films and can liner product lines along with strength in e-commerce. Investments in the latest equipment technologies, advantaged film development and design for circularity are likely to enhance its competency in the long run. The stock has gained 25% so far this year.
The Zacks Consensus Estimate for Berry Global’s fiscal 2022 earnings suggests year-over-year growth of 2.8%. The consensus mark has moved up 18% over the past 60 days. The company manufactures and supplies non-woven, flexible, and rigid products in consumer and industrial end markets. The company has a trailing four-quarter earnings surprise of 16.5%, on average.
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International Paper Company (IP): Free Stock Analysis Report
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