WestRock Company (NYSE:WRK) is having a tough time convincing investors about its growth prospects amid concerns of a trade war between the United States and China. Shares of the packaging manufacturer slumped 19.8% in December, according to data provided by S&P Global Market Intelligence, extending its full-year losses to a steep 40%.
Interestingly, WestRock recently made a big acquisition and delivered strong numbers for fiscal 2018 (year ended Sept. 30). Yet a string of analyst downgrades in December amid macro concerns spooked investors. The stock, however, appears to have caught the attention of value investors already: WestRock’s up nearly 8% so far this month as of this writing.
In FY 2018, WestRock grew sales by 9.6% and earned nearly 41% higher combined income before taxes from its corrugated and consumer packaging segments. WestRock’s operating cash flow surged to $2.4 billion from $1.9 billion in FY 2017. The company also increased its dividend by 5.8% during the year, and the stock yields a solid 4.8% currently.
In November, WestRock also closed the acquisition of KapStone Paper and Packaging in a $4.9 billion deal. KapStone should strengthen WestRock’s foothold in the corrugated packaging market as well as add specialty kraft paper products to its portfolio.
Unfortunately, the packaging industry isn’t in the best shape, or so it seems given the string of analyst ratings downgrades that WestRock stock has received in recent weeks.
In December, Goldman Sachs and BofA/Merrill Lynch downgraded their rating on WestRock to neutral. This month so far, Citigroup and RBC Capital have downgraded their ratings on WestRock. Fly.com offers some insight into what’s going on here. Worry about rising supply and declining demand, especially in the containerboard market, is a common concern, with RBC also pointing at cost headwinds as an added hurdle.
You see, containerboard companies across the board are expanding capacity, from the U.S. to China to Europe. At the same time, industry experts see domestic demand waning on increased adoption of alternative packaging options and a slowdown in the economy. These factors could drive containerboard prices down and hurt profitability for manufacturers like WestRock even as input costs are on the rise.
To be fair, there’s some merit to analyst concerns. On the other hand, the paper packaging industry also has strong visible growth catalysts such as booming e-commerce. You should get some insight into where WestRock’s headed in 2019 and beyond during management’s upcoming earnings conference call on Jan. 31. Keep an eye open for it.