More Surprises in Packaging

What is the best stock in the packaging sector for investors who want to place capital where it benefits the environment the most (or where it will least harm the environment)?  In the long list of packaging producers a few stand out as ready to offer solutions to packaging waste.  We discussed three of them in the previous post “Best Surprises Arrive in a Box” on February 5^th.  Three more are offered here. 

Materials

DowDuPont, Inc. (DWDP:  NYSE) has its fingers in a number of markets, including packaging.  DuPont Packaging has joined with several other manufacturers to create the National Institute for the Processing of Empty Packaging (InPEV) that is aimed at collecting empty containers and promoting recycling. Surprising Brazil is ground zero in this effort, recycling as much as 95% of agriculture packaging.  DuPont has developed a resin called Fusabond that increases the recyclability of dissimilar materials into high-value products.  DuPont’s Fusabond apparently has been valuable in enabling Brazil’s recycling effort. 

To be clear, Fusabond is a polymer apparently still made from petroleum, but it is paving the way for the recycling of multi-layer plastic bottles into high-value flexible corrugated pipes as an example.  This means that plastic bottles that once were destined for a landfill (at best) or ended up at roadsides or water ways (at worse), are now more likely to be collected at point-of-use and trundled off by an enterprising recycler.

A stake in DowDuPont involves much more than packaging.  The Agriculture, Performance Materials & Coatings, and Polymers segments are important drivers of sales and earnings.  That diversity makes it possible for DowDuPont to convert about 14% of its revenue to operating cash.  Internally generated cash in turn provides strength to support a high dividend payout ratio that still leaves capital for investment.  Even though the company does rely on leverage, the debt-to-equity ratio is a manageable 42%.  Cash resources could cover a third of debt outstanding.

A share of DowDuPont will set an investor back 31 times trailing earnings.  The analyst group following the company apparently sees significant upside in the bottom line, leaving the ratio at 10.9 times forward earnings estimates. 

Wrap

The inventor of the ubiquitous ‘Bubble Wrap’ and owner of the trademark of that name, Sealed Air (SEE:  NYSE) also claims to be on the recycling bandwagon.  Its products are made of 100% recycled materials in the first place.  Then most of Sealed Air products can be recycled with corrugated cardboard boxes or with mixed paper.  The company accepts its Instapak foam cushions at over two dozen recycling centers worldwide (meaning there is not likely one near you and your bus stop).

Like so many others in the packaging sector Sealed Air has hitched its wagon to an industry-sponsored, non-profit organization devoted to sustainability and the environment.  For Sealed Air, it is the Ellen MacArthur Foundation’s New Plastics Economy initiative.  However, Sealed Air is doing more than just talking.  The company has invested in development of new renewable materials and recycling technologies for PET materials.

The recycling story may be influencing investors in Sealed Air.  The stock trades at 15.6 times the 2019 consensus estimate, well above the 12.5 average forward price earnings ratio for our selected group.  Earnings ratios are presented below.  Alternatively, it could just be the prospects for growth.  Analysts estimates imply 18.7% five-year compound annual growth in earnings for the company.

Fibers

In December 2018, at the Slush 2018 start-up event, Stora Enso Oyj (STE-R:  ST) teamed up with privately-held Sulapac to demonstrate a solution for sustainable drinking straws.  Stora Enso is using Sulapac’s biocomposite material made from wood and natural binders to mass produce drinking straws to replace to replace single-use plastic straws.  The Sulapac material can be easily dropped into Stora Enso’s existing extrusion lines, reducing time to market and investment requirements.  The partnership plans to have commercial volumes available for shipping in early 2019.

The renewable straw is just the most recent in a string of innovations and initiatives by Stora Enso, Sweden’s top consumer packaging producer.  The company has been working on sustainability for more than five years.  In 2013, the company published the first of its annual viewpoint report on retail packaging.  The company estimated back then that the retail industry could reduce costs by as much as 70% by using smart packaging solutions.  Stora Enso’s award winning EcoFishBox is an example.  Used in to pack fish in shops and restaurants, the EcoFishBox replaces plastics and is recyclable.  More importantly its saves space and costs in transport and warehousing. Consumers should be encouraged to hear that even though it is made from fiber-based material, the EcoFishBox is waterproof and leak-proof.

Single-use plastics are getting quite a bit of attention in the popular press.  These plastics are most likely to end up at the roadside or in waterways.  It might require a bit of additional work and expense for U.S. investors to take a position in the Sweden-based Stora Enso, but the stock provides a good vehicle to help solve the problem. 

Stora Enso shares look like a bargain with a multiple of 10.3 times trailing earnings compared to the group average of 23.7 times.  Yet on the basis expected earnings, the multiple is 9.82 times compared to 12.5 times for the group.  That suggests the analysts following Stora Enso are not expected as much growth as is expected for average of the group. 

The company is delivering a strong operating profit margin of 9.7% and return on equity of 15.5% is warrants respect.  The company will only just begin reaping the benefits of investment in the Sulapac plastic waste solution this year.  The argument can be made that investments in plastic waste solutions could reap above average growth in the future.

Large public companies do not have the packaging market to themselves.  In the next post we look at smaller, privately-held competitors.

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	10.32	9.82	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.