Morningstar | WestRock Manages Decent 3Q; Shares Appear Fairly Priced Relative to $53 FVE. See Updated Analyst Note from 03 Aug 2018
In its fiscal third quarter, WestRock maintained solid gains over the prior year, with adjusted segment EBITDA up 27% to $760 million, and adjusted earnings per share of $1.09. As with peers Packaging Corp. of America and International Paper, profitability in corrugated packaging led the way to higher profits. Versus the prior year, higher prices supported increased EBITDA margins, as volume was closer to flat compared with the prior year. With our long-term outlook unchanged, we maintain our $53 fair value estimate and no-moat rating.WestRock's larger recycled fiber mix, a key input cost, led to an especially large benefit to its corrugated packaging segment in the fiscal third quarter. Higher prices accounted for nearly all of the 29% increase in adjusted segment EBITDA versus the prior year. With recycled fiber prices still low, this benefit should aid the remainder of 2018. Over the longer term, we think WestRock's current level of profitability (23% adjusted EBITDA margins in the quarter) will fade by 3%-4% as a combination of higher input costs and suppressed inflation adjusted prices weigh on profitability. The primary driver of the lower prices (in real terms) will be industry capacity expansions that cause supply growth to overtake demand growth. Consistent with our view that this business produces commodity products, we do not believe it will be able to materially outearn its cost of capital.
In the consumer packaging segment, results were slightly more disappointing. Although adjusted segment EBITDA rose 18% over last year, much of the growth was inorganic as a result of the Multi Packaging Solutions acquisition. A combination of higher prices and better productivity was still largely offset by increased freight rates and rising input costs. Over time, we expect additional price increases will improve the economics of this business, though only enough to roughly earn its cost of capital.
WestRock is a provider of paper and packaging solutions for consumer and corrugated packaging markets. The company partners with its customers to provide paper and packaging solutions. The company's operating and business locations are in North America, South America, Europe, Asia and Australia. The company's segments include: Corrugated Packaging, which consists of the company's containerboard mills, corrugated packaging and distribution operations, as well as its merchandising displays and recycling procurement operations; Consumer Packaging, which consists of the company's consumer mills, food and beverage and partition operations; and Land and Development, which sells real estate primarily in the Charleston, SC region.
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