These Companies Can Box Their Way Out of a Corner
COVID-19 has taken a toll on containerboard producers, but we see opportunity.
COVID-19 has taken a toll on containerboard producers, but we see opportunity.
Containerboard profit margins surged amid limited supply and robust demand growth from 2016 to 2018, and management teams seized the opportunity to convert a host of mothballed paper mills to containerboard production, as we expected. The industry is now staring down a wall of capacity growth not seen in decades. Meanwhile, the coronavirus pandemic has ravaged box demand. Opportunity has turned into threat, and the containerboard companies have a fight on their hands.
Hard decisions lie ahead, but we believe the companies we cover will rise to the challenge: All three generate plenty of cash and have wisely avoided overindulging in debt during good times. Furthermore, all three possess low-cost assets that should weather the storm to see brighter days and wider margins.
While market prices for containerboard stocks have swung from record highs in 2018 to recent record lows, our message remains the same: Reality lies somewhere between boom and bust. The recent collapse in confidence among market participants and the sell side is an opportunity for patient buyers. Over the coming years, we think box demand will strengthen with the economy. And while the wall of supply appears threatening, small, high-cost players will be the ones to wash out, much as they did in previous downturns.
We expect WestRock (WRK), International Paper (IP), and Packaging Corp. of America (PKG) to ride out the storm. Fearful investors have flocked to high-quality PCA, leaving abundant upside opportunity for buyers of WestRock.
Top Learnings About 3 Key Containerboard Companies
Charles Gross does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.