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.
At the same time, further benefits are expected from the recent positive industry fundamentals in the North American containerboard market. These signs include consolidation, increasingly rational behavior of industry participants, high capacity utilization rates, and limited supply, which should bode well for the company’s recently-announced $50/ton containerboard price increase.
Lastly, additional upside to EPS could come from out-performance of the recently-outlined Smurfit integration synergy targets as management continues to find ways to increase productivity of the company’s mill and box-plant assets.
A story on integration
Sealed Air Corp (NYSE:SEE)’s total-solutions model combined with an industry leading innovation pipeline, high level of R&D spend focused on commercial success, recent management transition, and defensive portfolio make the company Barclay’s top pick in the packaging space in 2013.
Following a difficult 2012, and a full year of Diversey ownership (before acquisition, Diversey was a leading provider of cleaning, sanitation and hygiene solutions), the sentiment has recently shifted positively and should improve further into 2013 allowing for a high level of EPS growth to be combined with multiple expansion efforts.
Sealed Air Corp (NYSE:SEE)’s focus on integration/optimization continues to develop according to plan, with an estimated ~$200 million in total savings by 2014. Additionally, the company remains on track to divest ~$500 million in assets by mid-2013 which could aid the leverage profile.
Lastly, the industry and acquisition integration experience of new CEO Jerome Peribere should help to refocus the business, particularly at Diversey, and restore credibility with investors.
Other positive near-term catalysts include an upcoming analyst day this summer and the likely emergence of WR Grace from bankruptcy in late 2013. (For those who don’t know, Sealed Air Corp (NYSE:SEE) merged with WR Grace in 1998. WR Grace, after an unexpected rise in asbestos claims in 2000, filed for bankruptcy).
Combined, Sealed Air Corp (NYSE:SEE)’s shares could once again achieve a premium P/E multiple relative to peers this year. Both Rock-Tenn Company (NYSE:RKT) and Crown Holdings, Inc. (NYSE:CCK) are currently trading at a forward multiple of 12x.
Final word
Crown Holdings, Inc. (NYSE:CCK) is recommended as a buy on the basis of aggressive growth plans in the emerging markets. Rock-Tenn Company (NYSE:RKT) has solid valuations and a strong containerboard market in North America to form an appeal among investors. Sealed Air Corp (NYSE:SEE) is recommended as a buy on the basis of improving market sentiment and solid restructuring going on in the company.
The article Barclays Is Optimistic About Paper and Packaging originally appeared on Fool.com.
Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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