EUR 850.00 For Business Accounts Only

Morningstar | WestRock Posts Underwhelming Fiscal 1Q; Maintaining $53 FVE. See Updated Analyst Note from 31 Jan 2019

WestRock's consumer packaging segment remained under pressure throughout their fiscal first quarter. Segment-adjusted EBITDA margins narrowed meaningfully to 13.3%, down from 14.7% last year, as lower volumes and higher costs were more than enough to offset successful price increases. While we think margins have room to rise in the long run, rising freight rates, wages, and input costs suggest a longer path to rising profitability than we originally forecast. Despite our trimmed margin forecasts in the coming years, it was not enough to change our $53 per share fair value estimate. Our no-moat rating is unchanged.

Corrugated segment-adjusted EBITDA rose a much stronger 19%, though much of that was due to the Kapstone acquisition which closed last November. The purchase added roughly 10% to total shipments in the quarter, which will be closer to 15% during each full quarter to come. With the start of 2019, we've started to see signs of our long-term thesis playing out, with corrugated medium prices declining 3% in January. A few years of robust corrugated profitability has elicited a supply response that we expect to negatively impact pricing over time, which will narrow margins considerably in the long run. These effects could be magnified should global shipping volumes get impacted by an increased taste for tariffs.

All that said, we think the market is too pessimistic on WestRock. Our $53 per share fair value estimate assumes that consolidated operating margins contract from 9.8% in fiscal 2018 to 8.2% in fiscal 2023. Yet, the market values the stock nearly 20% less than we do--reflecting even more brutal assumptions that seem inconsistent with what's implied in peer valuations Packaging Corporation of America and International Paper.