E-commerce sales were up by 15% in 2012, a year with overall GDP growth of under 2%. What’s more, year-over-year growth in online commerce has been in the double digits in each quarter since mid-2010, according to comScore. And that trend looks to be accelerating out of the recession.
This is the third in a series of posts that takes a look at opportunities in the growing e-tail trend.
In the first, I took a look at Amazon, the fast-growing e-tail juggernaut. In the second, I looked at the two companies that delivery all those packages that people are ordering online: United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX).
UPS and FedEx offer less risky ways to play the e-tail megatrend than investing in Amazon. Both foresee steady growth in revenues, but offer dividends: FedEx Corporation (NYSE:FDX) at 1% and United Parcel Service, Inc. (NYSE:UPS) just below 3%. But both also have headwinds ahead of them. FedEx is just starting to execute a major restructuring in an effort to make itself a leaner, more efficient delivery company. But that reorganization will come at a cost of around $650 million, something sure to pressure the company’s earnings and margins in the near term. For UPS, those headwinds come in the form of pension obligations (of which it just paid a sum of $3 billion), union negotiations, and the reported loss of market share to its chief competitor.
In this post, my focus will shift to the companies that make the packaging materials needed for all those orders Amazon is filling and United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX) are delivering. There are a number of companies that operate in this sector, and some promising opportunities for investors.
Do the packaging producers offer an even better opportunity than the shippers or Amazon, the e-tail king?
Let’s take a look.
Bemis Company, Inc. (NYSE:BMS) is a packaging products company with a 155-year history and a track record of staying on the cutting edge of the industry. It has grown its revenues by an average of better than 10% a year since 2009. Earnings have grown at an average clip of about 9% over that time.
But 2012 was not a particularly stellar year for Bemis. Revenues were down over 2011 by about 3%, even though earnings were up. Bemis blamed that on letting go some of the less profitable packaging it had previously provided.
The company is also in the midst of consolidating the 78 plants it operates globally. It figures that consolidation will save about $45 million in 2013. That’s a considerable sum for a company that posted $173 million in income in 2012. So, in Bemis we see a more efficient packaging producer with a long track record of innovation focused on higher-margin products. All of that looks good. And the company expects to earn between $2.30 and $2.45 per share this year, giving it a reasonable forward-PE of around 16.
The trouble with Bemis as a play on e-tail is that e-commerce makes up only a very small amount of Bemis’s overall business. Indeed, 85% of the company’s sales comes from food packaging. Pharmaceuticals make up another significant piece of the pie. So, while Bemis would benefit if people buy more of these products it makes packaging for, it won’t necessarily matter how those purchases are made, in a store or online.
Admit it, you love to pop those bubbles
Our second packaging company to consider is Sealed Air Corp (NYSE:SEE).. You probably know Sealed Air as the maker of Bubble Wrap. Like Bemis, Sealed Air manufactures packaging for a variety of applications, and its single biggest area of business is food packaging. But where Bemis’s food business rings in at 85%, Sealed Air’s makes up less than half of the pie.
What’s more, the company’s incoming CEO says Sealed Air is “making good inroads in our e-commerce business.” It likes the prospects for its inflatable void-fill cushions and more advanced bubble cushions. Sales for its protective packaging business were up 4.4% in North America over the prior year, something company officials credited to “expanded market presence and strength in e-commerce.”
The stock has been on a tear. Sealed Air is up 17% since it reported earnings three weeks ago that beat Wall Street estimates. The stock is also up more than 50% over the past six months, a bubbly story, to say the least, for SEE investors.