The packaging
industry is large and growing at a fast pace according to industry research
firm Technavio. The global packaging
market will approach US$165 billion by 2021, implying annual compound growth
near 6%. E-commerce is the driving
factor, as consumers are lured to by the convenience of having a box goodies
delivered to the door by online retail platforms. Packaging producers have benefited right
alongside digital retailers.
The competitors
who have heard the call of demand are numerous, causing quite a bit of
fragmentation in the packaging market. Although
there are some large players dominating play for one packing product or
another. The packaging market is usually
divided up along the lines of materials:
board, rigid plastic, flexible, metal and glass. Alternatively, the industry is viewed from
the perspective of contents: food,
beverage, healthcare and personal care. No
matter how you sort them out, manufacturers of packaging are in the spotlight
as demand for plastic containers, boxes and bubble wrap mounts higher.
Yet packaging
waste represents a serious threat to the environment, not to mention a drain on
resources. The last post “Germany Takes
Lead in Packaging Cleanup” on February 5th detailed
efforts by that country to get a grip on the burgeoning problem.
What is the best stock for investors with a view on
placing capital where it benefits the environment the most or at least where it
will harm the environment the least? In
the long list of packaging producers a few stand out as ready to offer
solutions to packaging waste.
Paper
International Paper (IP:
NYSE) or IP for short is behemoth with a large share of the packaging
market. The company claims that it
recovers more than six million tons of paper each year, making it one of the
largest recyclers of paper in North America.
The recovered paper is used again in IP’s own mills or is sold to other
manufacturers.
IP management
has also endorsed a market-based solution to the packaging waste problem. In a position paper on the topic, IP
management makes a bit of a dig at current legislative proposals that would
shift responsibility for recycling from the consumer to producers of packaging,
a view that is also reflected in Germany’s Packaging Act or VerpackG that was discussed in the first of this
series on packaging waste. IP is quick
to take credit on behalf of the industry for the 50% decline in paper waste
going into landfills over the last fifteen years.
International
Paper recorded $23.3 billion in total sales in the most recently reported
twelve months, drawing from a well-established competitive position in
supplying paper and printing products.
The company also sells cellulose fibers to other manufacturers. The company has made the most of every dollar,
squeezing out 10.8% as operating profits and converted 13.9% of every sales
dollar to operating cash flow. That has
made it possible for the company to earn 24.0% on equity.
With such
exemplary fundamental metrics, IP might seem attractive. Valuation is also enticing. The stock is currently trading at 8.7 times
projected 2019 earnings and offers a 4.28% forward dividend yield. Why are we not pounding the table for
IP? It requires more than a position
paper or two to really be a part of the solution and not just a source of
excuses for the status quo.
Flexible Plastics
Amcor Ltd. (AMC:
ASX) has been researching ‘circularity’
for post-consumer flexible packaging.
Translated, plastics used to package items shipped or sold to consumers
can be captured for reuse or reformulation.
Their study raised confidence that economic solutions can be found.
First, it is critical that consumers and business sort plastic waste and
cooperate in recycling programs. Second,
recycling requires a strong business plan that capitalizes on high-value
recyclables to pay for retrieval and processing costs. Third, innovation and creativity are needed
to ensure flexible packaging has economic value after use.
Amcor has appointed a Sustainability Director, who offered some perspective on the packaging waste conundrum as recently as December 2018, when speaking at an event sponsored by the Consumer Goods Forum. Amcor apparently is a strong proponent of this concept of circularity, but their experience so far is that solutions to plastic pollution will be multi-fold and will require cooperation among packaging manufacturers, goods producers and consumers.
No analysts regard
Amcor as worthwhile enough for published estimates so there is no forward
earnings multiple. However, in terms of
trailing earnings Amcor’s rigid plastic containers business is priced at a
multiple of 23 times. Amcor’s operating
profit margin is 10.7%, making it is just as profitable as International Paper and
it converts 10.1% of its sales to operating cash flow. Apparently a premium is necessary to get the
‘circularity’ solution.
Dispensers
Aptar Group, Inc. (ATR:
NYSE) declared three years ago that it
planned to be landfill free - internally anyway. To be considered landfill free Aptar’s
various sites must reuse or recycle at least 90% of waste byproducts form its
manufacturing processes. At the beginning of 2019, the company had made
progress, but still has work to do. Even
though their own house is still not quite in order, in late 2018 Aptar
leadership made comments on a corporate blog regarding excess waste from the
e-commerce supply chain. Aptar
apparently endorses the Design for Sustainability (D4S) approach that calls on product developers to consider
a products full life cycle and how it will flow through a supply chain and end
in the consumers’ possession.
Even if investors just think Aptar management is just ‘talking the talk’ of environmental responsibility, the company is certainly delivering the profits typically of the industry. Its operating profit margin of 13.7% is well above the average of our selected group of packaging companies. Aptar is also priced at a premium relative to the group with the stock trading at 23.1 times forward earnings compared to the group average of 12.5 times.
Three more companies will be discussed in Part III of
this series on investing in environmentally friendly packaging.
Name
|
SYM
|
Operations
|
Market Cap
|
Amcor
Ltd.
|
AMC.AX
|
Rigid plastic food containers
|
$11,587
|
Aptar
Group, Inc.
|
ATR
|
Beauty and pharma packaging
|
$6,350
|
Ardagh
Group S.A.
|
ARD
|
Rigid plastic food containers
|
$2,880
|
Ball
Corporation
|
BLL
|
Metal consumer packaging
|
$17,980
|
Bemis
Company, Inc.
|
BMS
|
Plastic and folding cartons
|
$4,540
|
Berry
Plastics
|
BERY
|
Health, hygiene and consumer
|
$6,500
|
Crown
Holdings
|
CCK
|
Steel and aluminum cans
|
$6,950
|
DS Smith
Plc
|
SMDS.L
|
Corrugated and plastic packs
|
$6,205
|
DuPont
Packaging, Inc.
|
DWDP
|
Elastomers for packaging
|
$123,110
|
Gerrescheimer
AG
|
GXI.DE
|
Glass containers for pharma
|
$2,099
|
Graphic
Packaging
|
GPK
|
Paper food containers
|
$3,710
|
International
Paper
|
IP
|
Paper packaging
|
$18,950
|
Mondi Plc
|
MNDI.L
|
Paper bags and boxes
|
$11,879
|
Owens-Illinois,
Inc.
|
OI
|
Glass food & beverage containers
|
$3,160
|
Packaging
Corp Amer.
|
PKG
|
Corrugated and container board
|
$9,000
|
RPC Group
Plc
|
RPC.L
|
Plastic containers, surface coatings
|
$4,171
|
Sealed
Air
|
SEE
|
Flexible packaging, containers
|
$6,400
|
Silgan
Holdings, Inc.
|
SLGN
|
Metal, plastic consumer packaging
|
$3,150
|
Smurfit
Kappa Group
|
SKG.L
|
Corrugated and containerboard
|
$6,969
|
Stora
Enso Oyj
|
STE-R.ST
|
Wood, biomaterial packaging
|
$11,202
|
Westrock
Company
|
WRK
|
Corrugated packaging
|
$9,660
|
US Dollars in Millions
|
|||
Symbol
|
Revenue
|
Operating Margin
|
Operating Cash Flow
|
Return on Equity
|
AMC.AX
|
$6,749
|
10.7%
|
$678.6
|
75.0%
|
ATR
|
$6,350
|
13.7%
|
$269.2
|
15.0%
|
ARD
|
$2,880
|
8.1%
|
$766.0
|
na
|
BLL
|
$11,640
|
9.7%
|
$1,570.0
|
11.9%
|
BMS
|
$4,090
|
9.9%
|
$461.5
|
17.9%
|
BERY
|
$8,060
|
10.1%
|
$1,010.0
|
10.1%
|
CCK
|
$10,580
|
11.6%
|
$798.0
|
32.4%
|
SMDS.L
|
$8,006
|
8.0%
|
$640.0
|
10.8%
|
DWDP
|
$85,980
|
12.3%
|
na
|
4.0%
|
GXI.DE
|
$1,540
|
10.6%
|
$210.0
|
16.0%
|
GPK
|
$6,020
|
7.9%
|
-$373.8
|
16.4%
|
IP
|
$23,310
|
10.8%
|
$3,230.0
|
24.0%
|
MNDI.L
|
$8,056
|
9.5%
|
$1,243.2
|
19.5%
|
OI
|
$6,950
|
7.9%
|
$782.0
|
16.0%
|
PKG
|
$7,010
|
15.3%
|
$856.1
|
15.3%
|
RPC.L
|
$5,103
|
9.4%
|
$461.0
|
13.3%
|
SEE
|
$4,700
|
14.1%
|
$241.9
|
neg
|
SLGN
|
$4,450
|
9.4%
|
$506.5
|
27.2%
|
SKG.L
|
$9,720
|
4.9%
|
$849.2
|
21.2%
|
STE-R.ST
|
$1,317
|
9.7%
|
$138.3
|
15.5%
|
WRK
|
$16,720
|
9.5%
|
$2,480.0
|
8.0%
|
US Dollars in Millions
|
||||
SYM
|
Stock Price
|
P/BK
|
P/S
|
P/E
|
P/FE
|
P/CF
|
AMC.AX
|
$10.04
|
15.70
|
1.72
|
22.28
|
na
|
9.95
|
ATR
|
$101.07
|
4.55
|
2.35
|
32.06
|
23.05
|
23.59
|
ARD
|
$12.19
|
na
|
0.31
|
34.83
|
6.89
|
3.76
|
BLL
|
$53.00
|
5.03
|
1.55
|
41.09
|
19.63
|
7.41
|
BMS
|
$49.83
|
3.76
|
1.11
|
21.11
|
16.61
|
8.86
|
BERY
|
$49.90
|
4.49
|
0.81
|
15.95
|
12.11
|
7.98
|
CCK
|
$51.44
|
7.31
|
0.66
|
23.10
|
9.02
|
13.26
|
SMDS.L
|
$453.43
|
139.33
|
0.78
|
14.71
|
na
|
12.51
|
DWDP
|
$54.26
|
1.30
|
1.43
|
32.92
|
11.62
|
na
|
GXI.DE
|
$67.08
|
2.29
|
1.36
|
14.94
|
na
|
7.33
|
GPK
|
$12.38
|
2.36
|
0.62
|
17.44
|
13.91
|
-16.10
|
IP
|
$46.78
|
2.54
|
0.81
|
9.64
|
8.74
|
7.22
|
MNDI.L
|
$2,453.43
|
247.03
|
1.44
|
11.71
|
na
|
6.48
|
OI
|
$19.89
|
3.33
|
0.45
|
24.29
|
6.72
|
8.89
|
PKG
|
$96.00
|
3.56
|
1.28
|
12.31
|
11.27
|
8.19
|
RPC.L
|
$1,029.82
|
165.52
|
0.83
|
14.80
|
na
|
11.07
|
SEE
|
$40.76
|
neg
|
1.36
|
neg
|
14.93
|
19.43
|
SLGN
|
$28.52
|
3.58
|
0.71
|
14.19
|
12.85
|
8.79
|
SKG.L
|
$2,940.49
|
185.35
|
na
|
8.63
|
na
|
11.45
|
STE-R.ST
|
$13.99
|
13.41
|
na
|
97.78
|
na
|
9.52
|
WRK
|
$38.26
|
0.86
|
0.58
|
10.91
|
8.16
|
6.74
|
Averages
|
42.70
|
1.06
|
23.73
|
12.54
|
8.82
|
|
US Dollars |
Neither the author of the Small Cap Strategist web
log, Crystal Equity Research nor its affiliates have a beneficial interest in
the companies mentioned herein.
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