Why Do Hedge Funds Like Graphic Packaging Holding Company (GPK)?

Graphic Packaging Holding Company (NYSE:GPK) is a leading global paperboard packaging company. In this article, we’ll take a closer look at the company’s fundamentals and analyze hedge fund activity around the stock in the second quarter.

While there are many metrics that investors can assess in the investment process, the hedge fund sentiment is something that is often overlooked. However, hedge funds and other institutional investors allocate significant resources while making their bets and their long-term focus makes them the perfect investors to emulate. This is supported by our research, which determined that following the small-cap stocks that hedge funds are collectively bullish on can help a smaller investor to beat the S&P 500 by around 95 basis points per month (see the details here).

Graphic Packaging Holding Company (NYSE:GPK) was originally focused on the U.S. food and beverage categories but it has since evolved into a global operator with a diversified portfolio through acquisitions. Hedge funds like Graphic Packaging because the company accretively acquires/integrates other companies, consistently buys back its stock, has a conservatively leveraged balance sheet, and trades for a reasonable forward P/E of 16.2.

Graphic Packaging’s stock rallied from below $2 in 2009 to a high of $16 in early 2015 due to its accretive acquisition strategy. Its shares have pulled back since then due to a contraction in the company’s earnings multiple. Although its stock has retraced, Graphic Packaging’s management has continued its M&A strategy. Since early 2015, Graphic Packaging has completed multiple acquisitions in North America, including purchasing 11 converting facilities and a CRB mill. The deals have added around $450 million to its revenue and $54 million in EBITDA, the latter of which Graphic Packaging expects to ultimately grow to $70 million to $80 million annually within 12-to-24 months. In the second quarter, Graphic Packaging also completed the acquisition of Australian-based Colorpak, in a transaction that should contribute another $11 million-to-$13 million annually within two years.

Graphic Packaging reported solid second quarter earnings. Adjusted earnings for the period were $0.19 per share, unchanged from the same quarter of the prior year and in-line with estimates. Revenue came in at $1.1 billion, up by 3.8% year-over-year, and also in-line with the consensus. Due to $21.0 million in performance improvements in the quarter, adjusted EBITDA was $195.2 million, slightly higher than the year-ago period’s $192.1 million. Graphic Packaging’s management maintained their full-year outlook of an EBITDA increase of 4%-to-7% year-over-year and cash flow of $360-to-$380 million. In addition, Graphic Packaging bought back $37 million in shares, reducing its float by 0.84%.

As Graphic Packaging continues to make more tuck-in acquisitions, buys back stock, and unlocks synergy from its previous deals, hedge funds believe that the market will give Graphic Packaging more credit for its FCF (Graphic Packaging currently has a cash flow yield of 8.1%-to-8.6%) and send the stock up higher. Analysts meanwhile, have a price target of $15.44 per share on the stock, $1.03 above its current price.

We’ll analyze how the smart money traded Graphic Packaging in the second quarter on the next page.

Using our database of 749 hedge funds that filed 13F’s for the June 30 reporting period, the number of funds long Graphic Packaging Holding Company (NYSE:GPK) fell by five quarter-over-quarter to 36 at the end of June. Those 36 funds owned $1.04 billion worth of Graphic Packaging Holding Company (NYSE:GPK) shares, which accounted for 25.80% of the float on June 30.

In terms of individual activity, the top shareholder of the stock in our database was David Cohen and Harold Levy‘s Iridian Asset Management, which cut its stake in it by 7% during the second quarter, to 26.53 million shares, good for a 3.08% chunk of its portfolio. First Eagle Investment Management also trimmed its Graphic Packaging holding during the period, by 2% year-over-year to 9.62 million shares. Going the opposite way was Barry Rosenstein‘s JANA Partners, which initiated a position of 10.34 million shares between March 31 and June 30. Overall, seven out of the top-ten shareholders of Graphic Packaging in our system on June 30 cut the size of their stake in the company during the second quarter.

Disclosure: None