Paper Cuts: KeyBanc Downgrades International Paper, Westrock, Packaging Corp. Of America

The paper sector is witnessing deteriorating fundamentals in containerboard, pulp and uncoated freesheet, according to KeyBanc Capital Markets.

Despite industry fundamentals being worse than in recent years, shares of International Paper Co IP, Westrock Co WRK and Packaging Corp Of America PKG are trading in-line with or higher than their historical averages, according to the sell-side firm.

The Analyst

Adam Josephson downgraded International Paper ($38 price target), Westrock ($32 PT) and Packaging Corp. Of America ($89 PT) from Sector Weight to Underweight.

The Thesis

Although the shares of International Paper, WestRock and Packaging Corp of America have underperformed over the past year, there seems to be further downside to KeyBanc’s below-consensus estimates for 2020, Josephson said in a Sunday downgrade note. (See his track record here.)

Although KeyBanc’s estimates are below the consensus, they do not reflect any further price declines, the analyst said. Additional price declines will result in downside to the estimates, he said.

Paper industry prices seem to be on a downtrend following years of market strength, Josephson said.

“Given our belief that estimates likely have further room to fall, the fact that our 2020 estimates are based on margins no lower than historical averages, and the fact that multiples on our 2020 estimates are no lower than historical averages, we are of the view that the stocks will do no better than perform in line with the sector over the next 9-12 months, and in fact are more likely to underperform."

Price Action

International Paper shares were down 1.92% at the time of publication Monday, while Westrock shares were down 3.68% and Packaging Corp. shares were down 2.75%.

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