Wall Street has recently turned extremely bullish on the paper and packaging industry. This has happened for three primary reasons:
1.) Recent price hikes in the containerboard segment, which clearly invite improvements in margins. Prices have gone up as a response to high capacity utilization and low inventory levels.
2.) There is an increased trend toward returning cash to shareholders in the packaging segment.
3.) Emerging market expansion plans among companies operating in this sector.
Which stocks to buy?
Barclays recently issued a list of its favorite industrial stocks, and it contained three companies related to paper and packaging.
Philadelphia-based Crown Holdings, Inc. (NYSE:CCK) is the first of the lot. Six months back, the market was concerned about Crown Holdings, Inc. (NYSE:CCK), specifically that the company’s Asia Pacific expansion plans were too aggressive and could potentially generate increased earnings volatility. Now, however, the view has changed considerably as the company’s management has shown their capability to change or cancel plans as needed.
Barclays believes that all of the volume coming online in 2013 is contracted, which should lead to lower earnings volatility going forward. It is interesting to note that a low-growth environment in the packaging industry has compelled these companies to introduce shareholder-friendly actions, like share repurchases or dividend hikes.
Similarly, with more predictable cash flow expected this year, Crown Holdings, Inc. (NYSE:CCK) will have additional capital for share buybacks and/or a dividend, providing a positive near-term catalyst for the stock.
Overall, the can industry has been seen to be resilient throughout an uncertain macro environment. Combined with Crown Holdings, Inc. (NYSE:CCK)’s stable earnings stream and solid operational performance, the company is a top pick.
Strong containerboard industry helping this company
Rock-Tenn Company (NYSE:RKT) has been a super free-cash-flow story with potential synergy upside enhanced by leverage to future price hikes.
The company’s defensive end-market exposure (~85% of containerboard sales for food and beverage and consumer non-durables) should translate to relatively stable earnings going forward.
Barclays believes that the company is managing to maximize long-term free-cash-flow returns. The firm also suggests that the current variance between consensus 2013 EPS and the projected free cash flow per share has gone relatively unnoticed and under-appreciated by the market. The 2013 consensus EPS is currently only ~$6, but the company can generate more than $11 per share of free cash flow.
Rock-Tenn Company (NYSE:RKT) plans to use a significant portion of its free cash flow for a debt pay-down in order to reach its goal of ~2x net debt/EBITDA by the end of FY14. Once this leverage ratio is achieved, the company could be more aggressive around share buybacks, another potential longer-term catalyst for the stock.