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Why International Paper, WestRock, and Packaging Corp. Stocks All Crashed Today - The Motley Fool

What happened

There was a sell-off in cardboard packaging stocks this morning, with shares of International Paper (IP -12.13%) down 9.4% at 10:30 a.m. ET on Friday, Packaging Corporation of America (PKG -10.93%) shares down 9.7%, and the stock of WestRock (WRK -10.93%) down 9.8%.

So what

Shares of FedEx (FDX -22.22%) plunged more than 22% this morning after the company issued an earnings warning predicated on softening global volume. The volume FedEx referred to was the number of packages wrapped in cardboard and shipped to customers. And if that volume is down, then it makes sense that the demand for cardboard around the world might be falling as well.

Investment bank Jefferies cut its ratings on each of the three paper stocks this morning. International Paper and Packaging Corp. both suffered actual downgrades to underperform (sell), with price targets set at $31 and $112, respectively. WestRock barely dodged the downgrade bullet, being left at hold, but its price target was cut 7% to $42 per share, according to a report from The Fly this morning. And that's not even the bad news.  

In announcing its downgrades, Jefferies didn't say its decision was based exclusively (or even primarily) on FedEx's earnings warning, but rather warned that there's a "massive inventory glut" in cardboard.

Orders for cardboard packaging are slowing down sharply, the analyst says. Manufacturers like International Paper, Packaging Corp., and WestRock are likely to slash prices in the fourth quarter. And because new cardboard manufacturing capacity is still coming on line, Jefferies expects this situation to get worse in 2023.

Now what

That's miserable news for the paper companies and for investors who are still expecting paper profits to surge this year. Expectations are for 2022 earnings growth of 10% at International Paper, 18% at WestRock, and 30% at Packaging Corp., according to data from S&P Global Market Intelligence, with at worst modest retreats in profitability in 2023.

At present, we don't know exactly how bad the damage might get, only that Jefferies is expecting it to get really bad. But there's good news here, too.

All three of these stocks still trade at rather modest valuations: just 11 times trailing earnings for WestRock, 11.2 times for International Paper, and 12.2 for Packaging Corp. And all three pay very respectable, above-market dividend yields. International Paper, the most recognizable name of the three, has nearly the lowest P/E ratio and by far the greatest dividend yield at 4.7%.

But if I were in the market for a cardboard company, and interested in taking advantage of today's sell-off to buy just one stock, I think I'd go with Packaging Corporation of America. At 12.2 times earnings, it's more expensive than the others, but its 3.8% dividend yield is more than generous. And if hard times are coming, Packaging Corp.'s $2 billion net debt load is the smallest and the easiest to manage, giving it the best chance of emerging from this downturn unscathed.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx and Jefferies Financial Group Inc. The Motley Fool has a disclosure policy.

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Why International Paper, WestRock, and Packaging Corp. Stocks All Crashed Today - The Motley Fool
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