Market Overview

Paper Cuts: BMO Downgrades WestRock, Packaging Corp, International Paper

Paper Cuts: BMO Downgrades WestRock, Packaging Corp, International Paper
Related IP
Bank of America's Favorite Stock Ideas For 2019
Large 3PLs Break Into Frothy Memphis Headhaul Market
Related PKG
8 Biggest Price Target Changes For Wednesday
Benzinga's Top Upgrades, Downgrades For January 9, 2019

China-based Nine Dragons Paper Holdings, a manufacturer of containerboard products including lineboard, announced hundreds of millions of dollars in new investments this week that include conversion projects at coated paper mills in Biron, Wisconsin and Rumford, Maine.

The announcement represents a negative catalyst for American-listed paper companies given expectations for a surge in supply, according to BMO Capital Markets. 

The Analyst

Analyst Mark Wilde made the following rating and price target changes:

WestRock Co (NYSE: WRK) downgraded from Outperform to Market Perform, price target lowered from $80 to $54.

Packaging Corp of America (NYSE: PKG) downgraded from Outperform to Market Perform, price target lowered from $130 to $108.

International Paper Co (NYSE: IP) downgraded from Outperform to Market Perform, price target lowered from $66 to $51.

The Thesis

Nine Dragons' investment in multiple coated paper mills facilities in the U.S. comes at a time of rising industry supply and could prove to be the largest capacity surge in more than two decades, Wilde said in a note. (See the analyst's track record here.) 

The announcement follows recent moves from International Paper and Packaging Corp of America, both of which are doing major conversions of their own, he said. WestRock is building a large machine to replace its older equipment in South Carolina, Wilde said. 

It's unclear how all the new capacity will be absorbed, and the analyst's supply-demand model calls for operating rates to fall from 97.5 percent in 2017 to 90.9 percent by 2021.

Demand growth has slowed despite a strong macro economy, and industry leaders will be forced to fight to maintain pricing while protecting market share from smaller players looking to steal small amounts of market share, Wilde said. 


Westrock's stock valuation is "not expensive," although the risk of the containerboard market getting more competitive than previously expected should be seen as an overhang for the stock, in BMO's view. The near-term impact could be seen as early as next year, Wilde said; the analyst lowered the 2019 EBITDA estimate from $3.17 billion to $3.07 billion.

Packaging Corp

Despite boasting best-in-class margins and a strong balance sheet, Packaging Corp will still be impacted by the new market dynamics, the analyst said. While the company does have some financial flexibility, the containerboard market will become rougher than expected, and a revision in 2019 EBITDA estimates from $1.57 billion to $1.53 billion is warranted, he said. 

International Paper

International Paper's stock is "not expensive" at 6.4 times 2019 estimated EBITDA, with a 10.7-percent free cash flow yield — but similar to its peers, International Paper won't be immune from the new market dynamics, according to BMO. The firm's 2019 EBITDA estimate was lowered from $4.4 billion to $4.3 billion.

Price Action

WestRock shares were trading down 4.6 percent to $46.87 at the time of publication Tuesday, while Packaging Corporation was down 3.38 percent at $97.95 and International Paper was down 3.21 percent at $45.81. 

Related Links:

Analyst: Investors Should 'Applaud' International Paper For Ending Proposed M&A Deal

The Price Of Paper Is Increasing As Companies Try To Stay Profitable In Electronic Age

Latest Ratings for IP

Jan 2019Wells FargoDowngradesOutperformMarket Perform
Oct 2018BarclaysMaintainsUnderweightUnderweight
Oct 2018ArgusMaintainsBuyBuy

View More Analyst Ratings for IP
View the Latest Analyst Ratings

Posted-In: BMO Capital Markets Mark Wilde packaging paperAnalyst Color Downgrades Price Target Analyst Ratings Best of Benzinga


Related Articles (IP + PKG)

View Comments and Join the Discussion!

Latest Ratings

CNPRBC CapitalUpgrades34.0
View the Latest Analytics Ratings
Don't Miss Out!
Join Our Newsletter
Subscribe to:
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Fintech Focus
Your weekly roundup of hot topics in the exciting world of fintech.
Thank You
for registering for Benzinga’s newsletters and alerts.
• The Daily Analysts Ratings email will be received daily between 7am and 10am.
• The Market in 5 Minutes email will be received daily between 7am and 8am.
• The Fintech Focus email will be received every Friday between 2pm and 5pm.

3 Headwinds Hindering Mylan

GBP/USD Forecast: Sterling Slides Lower As Irish Leader Gets Involved In Brussels Brexit Debate