WestRock Company WRK remains well-poised for growth, backed by its focus on execution of capital allocation strategy and KapStone acquisition. Improving industry conditions and a positive volume along with pricing dynamics are other key growth drivers for the company. However, raw material cost inflation and weak demand for processed foods as well as carbonated drinks remain headwinds.
The provider of paper and packaging solutions with a market capitalization of approximately $16 billion, carries a Zacks Rank #3 (Hold). The stock has an estimated long-term earnings growth rate of 12.8%.
Below, we briefly discuss the company’s potential growth drivers and possible downsides.
Factors Favoring WestRock
Positive Estimate Revisions, Growth Projections
The Zacks Consensus Estimate for 2018 and 2019 for WestRock has been revised nearly 1% and around 5% upward, respectively, over the past 30 days. The Zacks Consensus Estimate for current-year earnings is pegged at $3.90, reflecting an estimated year-over-year growth of 49%. The Zacks Consensus Estimate for earnings for 2019 is pegged at $4.76, representing an estimated year-over-year surge of 82%.
Positive Earnings Surprise History
WestRock outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering an average positive earnings surprise of 13.48%.
Shares of WestRock have outperformed its industry over the past six months. The stock has gained around 12% compared with the industry’s growth of 10%.
Higher Inventory Turnover Ratio
Over the trailing 12 months, the inventory turnover ratio for WestRock has been 7.1% compared with the industry’s level of 6.1%. The higher the metric is, faster will be the rate at which it is sold, suggesting effective inventory management.
Growth Drivers in Place
WestRock is well-poised to gain from a continuous focus on the execution of disciplined capital allocation strategy. The company paid $110 million as dividends in first-quarter fiscal 2018, invested $214 million in capital expenditures and $108 million to increase its ownership interest in Grupo Gondi.
The company has strong opportunities to invest in business as well as M&A activity. Thus, it expects to allocate more capital toward growth and margin improvement opportunities than share repurchases in the near term.
Further, the company projected base capital expenditures of $850 million for fiscal 2018. Approximately, half the amount will be spent on maintenance and replacement projects while the remaining for improving mill and converting assets. Additionally, the company has plans to invest $100 million in two strategic projects namely the Brazilian box plant and the installation of the state-of-the-art curtain coder at the Mahrt mill.
In January 2018, WestRock agreed to acquire all the outstanding shares of rival KapStone Paper and Packaging Corporation KS. The buyout will enhance WestRock’s North American corrugated packaging business and provide complementary products. The deal will also help WestRock fortify its presence in the Western United States and to compete better in the growing agricultural markets in the region.
Moreover, the company anticipates robust growth in fiscal 2018 owing to overall congenial industry conditions, a positive volume and pricing dynamics. WestRock predicted revenues of around $16.3 billion in the fiscal, reflecting 10% year-over-year growth. Its adjusted segment EBITDA will likely be higher than $2.8 billion, a 20% jump over fiscal 2017.
Headwinds for WestRock
During second-quarter fiscal 2018, WestRock apprehends moderate inflation in OCC (old corrugated container) prices. Commodity inflation is projected at around $40-$45 million pretax for the quarter. Moreover, the wintry chill may leave an additional $15-$20 million sequential impact.
Again, the folding carton markets remain challenged by soft demand for processed, frozen and dry foods. This is in line with the ongoing consumer preference for fresh foods. Moreover, demand for carbonated drinks continues to be a drag, particularly in North America, which might affect WestRock’s performance.
Investors might want to hold on to the stock for the moment as it shows ample prospects of outperforming its peers in the near future.
Stocks to Consider
A couple of better-ranked stocks in the same sector are Veritiv Corporation VRTV and Stora Enso Oyj SEOAY. While Veritiv Corporation sports a Zacks Rank #1 (Strong Buy), Stora Enso carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Veritiv has a long-term earnings growth rate of 6%. Its shares have climbed 20% over the past six months.
Stora Enso has a long-term earnings growth rate of 7.5%. The stock has surged 31.5% in the past six months.
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