All posts from Zacks
Zacks in Our Research. Your Success.,

Paper Stocks Slated to Report Earnings This Week: IP, WRK

As we approach the middle of the earnings season, the week ahead is expected to be extremely busy as 183 S&P 500 companies have lined up to report their first-quarter numbers. So far, the 71 index members, who have already reported their quarterly results, put up a 9% drop in earnings on the scoreboard. However, more companies are posting positive surprises in both the top and bottom lines as evident from the blended beat of 49.3%.

Considering the members yet to report, overall earnings are expected to tumble 9.7% for the quarter. In case the projection materializes, this will mark the fourth consecutive quarter of negative earnings growth for the index. For a detailed account of the earnings outlook for all the Zacks sectors, please read our Earnings Trends report.

The Paper and related products industry falls under the Basic Materials sector, which is expected to log a 21.6% plunge in quarterly earnings. Despite the projection of overall negative earnings growth for the sector, the paper and related products industry is currently favorably placed with a Zacks Rank #63. Let’s take a closer look at what sets this industry apart.

Growing demand for paper for use in packaging materials continues to be the primary growth driver of the industry, while demand for printed paper remains tepid due to the ongoing transition to digital media and paperless communication across most developed economies. This has urged paper companies to restructure and transform their business into core packaging companies.

Lately, declines have been noted in the prices of all types of containerboard. Nevertheless, North American containerboard producers have benefited from low input costs (wood fiber, recycled fiber, energy, chemicals, etc.), which helped maintain margin stability despite the ongoing price erosion. Even though these input costs will not remain low permanently, we believe that the paper stocks will benefit from the same in the first quarter. Further, backed by better-than-expected demand levels, containerboard producers should be able to deliver solid earnings this quarter.

On the flipside, exchange rate volatility remains a major concern as many companies are exposed to input costs and selling prices in different currencies. Along with the dollar/euro exchange rate, volatility in the Brazilian real and the Russian ruble are also important given that Brazil is a global source of fiber. The domestic market is presently in a state of oversupply as evident from the high level of inventories and heightened exports in the wake of falling prices. Though these will remain headwinds, a rise in seasonal demand, along with a period of heavy maintenance, containerboard prices should eventually stabilize.

With this in the backdrop, investors would be interested to see how major paper stocks fare in their upcoming releases this week. Apart from beats and misses, focus will also be on management outlooks on containerboard demand, updates on market conditions, domestic and export pricing environment, and whether they will take downtime to bring inventory levels to more manageable levels.

This week, eyes will be on the leading global producer of packaging, paper and pulp, International Paper Company IP as the company reports first-quarter 2016 results before the opening bell on Apr 27. With International Paper's shifting its focus toward its core strengths, the company’s restructuring initiatives and favorable demand trends bode well for growth in the to-be-reported quarter. We expect International Paper to report a positive earnings surprise this season backed by its Zacks Rank #3 (Hold) and Earnings ESP of +1.45%. (Read more: Will International Paper Beat Earnings Yet Again in Q1?)

International Paper’s Surprise History: In the prior quarter, this paper manufacturer had reported a positive earnings surprise of 4.82%. The above chart depicts International Paper's impressive earnings surprise history, wherein the company beat earnings estimates in all of the past four quarters, with an average positive earnings surprise of 6.19%.

Another global leading provider of packaging solutions and manufacturers of containerboard and paperboard, WestRock Company WRK is slated to report second-quarter fiscal 2016 results on Apr 29, before the market opens. WestRock should continue to benefit from its acquisitions, investment in capacity, growth initiatives, and the spin-off of the non-core Specialty business. The combination of the company’s Zacks Rank #3 and Earnings ESP of +5.77% make us confident of an earnings beat. (Read more: Paper Stock WestRock  Likely to Beat Q2 Earnings)

WestRock’s Surprise History: WestRock recorded a 1.72% positive earnings surprise in the last reported quarter. The above chart indicates that WestRock outpaced the Zacks Consensus Estimate in two of the last four quarters and met the same in two. The average positive surprise was 3.34%.

The Bottom Line

While the tide seems to be in favor for the paper stocks in the first quarter, will they be able to sail through the season and deliver solid earnings beats? Stay tuned for our full earnings articles to see how these stocks actually fare this season.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
INTL PAPER (IP): Free Stock Analysis Report
WESTROCK CO (WRK): Free Stock Analysis Report
To read this article on click here.
Zacks Investment Research