Bank Of America Hits 'Reset' Button On The Packaging Industry

• Analysts at Bank of America commented in a note on Tuesday it has been a "particularly challenging" period for packaging stocks.
• Packaging (particularly specialty) and wood products are preferred investment choices over containerboard stocks.
• Shares of AptarGroup, Inc. ATR were upgraded to Buy from Neutral while shares of Brady Corp BRC were downgraded to Neutral from Underperform.

In a report published Tuesday, Bank of America analyst George Staphos revisited the packaging and paper/forest sector, noting that emerging market factors and currency exchange fluctuations have "broadly" reduced his earnings per share forecasts - resulting in a "reset" of the group's expectations heading into 2016.

Staphos may have "overstayed our welcome" with some Buy ratings given industry fundamentals and the relative total shareholder return across stocks. As such, the analyst is "resetting" ratings across the group with a preference for packaging (particularly specialty) stocks.

Staphos expanded that China's move to devalue its currency undermines material stocks and creates a "spillover effect" in other markets. In addition, the U.S. dollar is expected to strengthen versus major currencies which results in an earnings revision to 2016 estimates. Accordingly, a downward revised earnings estimate results in lower price targets (and ratings) for stocks under the analyst's coverage.

However, Staphos noted that the specialty packaging segment can benefit as lower resin prices are a positive catalyst for specialty packaging stocks. For example, polypropylene prices are down an average of $0.24/lb (26 percent year-over-year) and 4 percent sequentially from the second quarter. At the same time, the analyst stated that a proprietary survey suggested "fewer catalysts" and "potentially some increased headwinds" for containerboard stocks.

AptarGroup A ‘High Quality' Specialty Packaging Company

Shares of AptarGroup, Inc. ATR were upgraded to Buy from Neutral with a price target raised to $76 from a previous $70 as underlying volume, driven by the packaging market's continued conversions to Aptar's dispensing products should provide enough revenue and earnings growth to justify an investment versus its peers.

Meanwhile, Aptar also has opportunities to grow in Food + Beverage and Pharma by double digit percentages, offering investors an attractive combination of diversification and counter-cyclicality.

Downgrading Brady Corp… Again

Staphos downgraded shares of Brady Corp BRC to Neutral from Underperform with an unchanged $20 price target. Just one week ago the analyst downgraded the stock to Neutral following its "challenging" fourth-quarter print.

Staphos is now taking his rating one notch lower given its "relative total shareholder return" versus its peers as the company continues to "work its way" through a turnaround, and faces many headwinds including operational inefficiencies related to facility consolidation, growth investments in digital, and increased IT spending.

Other Rating Changes

• Shares of Owens-Illinois Inc OI were upgraded to Buy from Neutral.
• Shares of Silgan Holdings Inc. SLGN were upgraded to Neutral from Outperform.
• Shares of Weyerhauser Co WY were upgraded to Buy from Neutral.
• Shares of Crown Holdings, Inc. CCK were downgraded to Neutral from Buy.
• Shares of International Paper Co IP were downgraded to Neutral from Buy.
• Shares of Packaging Corp Of America PKG were downgraded to Neutral from Buy.
• Shares of Sealed Air Corp SEE were downgraded to Neutral from Buy.

Image credit: Andrew Bowden, Flickr