Industrial activities are recovering from the macroeconomic challenges. Amid this, rising demand for sustainable packaging and the requirement for durable packaging to safeguard products during shipping are boosting the prospects of this segment of the industrial sector.
Against this backdrop, it could be wise to buy fundamentally strong industrial stocks like Graphic Packaging Holding Company (GPK), Greif, Inc. (GEF), and Karat Packaging Inc. (KRT).
Before diving deeper into the fundamentals of these stocks, let’s discuss the prospects of the industrial sector, particularly the packaging segment.
In the near past, the industrial sector faced challenges like high inflation, rising costs, supply chain issues, and rapid interest rate hikes, which soured the sector’s outlook. However, recovery seems to be underway, as industrial production in the United States increased 0.4% in August, while manufacturing output rose 0.1%.
Moreover, despite facing challenges, the Industrial Select Sector SPDR Fund (XLI) gained 21.4% over the past year, outperforming the 17.2% gains of the broader SPDR S&P 500 ETF Trust (SPY).
Industrial packaging is crucial for the supply chain of various industries. The market is set for growth over the upcoming years due to rising demand for packaged goods, expanding trade activities, and broad environmental concerns.
Companies in this industry are launching new products that align with the greater drive toward sustainability and recyclable packaging. The industrial packaging market is estimated to grow at a CAGR of 5% to reach $80.88 billion in 2028.
Keeping that in mind, let’s now discuss the fundamentals of the Industrial – Packaging stocks listed above, starting with the third stock.
Stock #3: Graphic Packaging Holding Company (GPK)
GPK offers sustainable fibre-based packaging solutions to different industries, including food, beverages, foodservice, and other consumer products. It operates through three broad segments: Paperboard Mills; Americas Paperboard Packaging; and Europe Paperboard Packaging.
On July 28, GPK declared a quarterly dividend of $0.10 per share of common stock, payable to stockholders on October 5, 2023. Its annual dividend of $0.40 yields 1.79% on prevailing prices. Its dividend payouts have grown at CAGRs of 10.1% and 5.9% over the past three and five years, respectively.
GPK’s trailing-12-month ROCE of 32.54% is 283.8% higher than the industry average of 8.48%. Additionally, its trailing-12-month cash from operations of $1.09 billion is 204.5% higher than the industry average of $359 million.
In the fiscal second quarter that ended on June 30, 2023, GPK’s net sales increased 1.4% year-over-year to $2.39 billion, while its income from operations increased 75.7% from the year-ago value to $267 million.
The company’s adjusted net income and adjusted EPS amounted to $203 million and $0.66, representing increases of 9.7% and 10% from the prior-year quarter, respectively. Also, its adjusted EBITDA increased 14.4% year-over-year to $453 million.
For the fiscal year 2023, the company expects its net sales to be about $10 billion. Its adjusted EBITDA is expected to be between $1.8 and $2.0 billion, while adjusted cash flow is likely to be between $600 and $800 million.
The consensus revenue estimate of $2.48 billion for the third fiscal quarter (ending September 2023) represents a 1.2% increase year-over-year. The consensus EPS estimate of $0.72 for the same period indicates a rise of 7.9% from the prior-year period. It surpassed the revenue and EPS estimates in three of the four trailing quarters, which is impressive.
GPK’s shares have gained 12.7% over the past year to close the last trading session at $22.16. It has gained 1.8% over the past month.
GPK’s POWR Ratings reflect this robust outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
GPK has a B grade for Value, Momentum, and Quality. Within the B-rated Industrial – Packaging industry, it is ranked #7 out of 20 stocks. Click here for the additional POWR Ratings for Growth, Stability, and Sentiment for GPK.
Stock #2: Greif, Inc. (GEF)
GEF produces and sells industrial packaging products, operating through the three broad segments of Global Industrial Packaging; Paper Packaging & Services; and Land Management.
On August 30, GEF announced that it had acquired a 51% ownership interest in ColePak, LLC, adding a completely new product offering to the Greif paper converting portfolio. This is expected to expand the company’s topline.
On August 29, GEF declared quarterly cash dividends of $0.52 per share on its Class A common stock and $0.78 per share on its Class B common stock, payable to shareholders on October 2, 2023.
The company’s annual dividend of $2.08 yields 3.15% on current prices. Moreover, its dividend payouts have grown at a 4.7% CAGR over the past three years and a 3.5% CAGR over the past five years.
GEF’s trailing-12-month levered FCF margin of 8.06% is 117.7% higher than the industry average of 3.70%, while its trailing-12-month ROCE of 21.42% is 152.6% higher than the 8.48% industry average.
For the nine months ended July 31, 2023, GEF’s operating profit increased 5.4% year-over-year to $493.10 million, while net income attributable to GEF rose 5.1% from the same period last year to $291.40 million. Moreover, its earnings per share attributable to GEF common shareholders of Class A common stock improved 7.8% from the prior-year period to $4.99.
Analysts expect GEF’s revenue to increase 3.3% year-over-year to $5.42 billion for the next fiscal year (ending October 2024). Its EPS for the same period is expected to come in at $5.78.
The stock has gained 14.4% over the past year and 9.9% over the past six months to close the last trading session at $67.32.
It’s no surprise that GEF has an overall rating of B, equating to Buy in our POWR Ratings system.
The stock has a Value, Momentum, Stability, and Quality grade of B. It is ranked #3 in the Industrial - Packaging industry.
GEF’s additional POWR Ratings for Growth and Sentiment can be seen here.
Stock #1: Karat Packaging Inc. (KRT)
KRT manufactures and distributes single-use disposable products in plastic, paper, biopolymer-based, and other compostable forms. Its product offerings include food and take-out containers, bags, tableware, cups, lids, cutlery, and other products under the Karat Earth brand.
On September 19, KRT announced the completion of its strategic initiative to expand its national salesforce by adding five sales representatives focusing on the East Coast and Midwest regions. The new team is expected to bolster the company’s presence in new regions.
On August 9, the company declared a special cash dividend of $0.40 per share on its common stock alongside a quarterly dividend of $0.10 per share. Its annual dividend of $0.40 yields 1.83% on the current price level.
In terms of the trailing-12-month levered FCF margin, KRT’s 13.23% is 138.2% higher than the 5.56% industry average. Furthermore, the stock’s 1.52x trailing-12-month asset turnover ratio is 87.9% higher than the 0.81x industry average.
KRT’s net sales for the second quarter (ended June 30, 2023) came in at $108.74 million. Its gross profit increased 23.3% year-over-year to $41.86 million. Net income attributable to KRT rose 65.5% from the prior-year period to $10.50 million. In addition, the adjusted EPS and adjusted EBITDA increased 102.9% and 78.6% year-over-year to $0.69 and $21.14 million, respectively.
For the fourth quarter (ending December 2023), Street expects KRT’s EPS and revenue to increase 26.7% and 13.3% from the prior-year quarter to $0.36 and $104.98 million, respectively.
Over the past six months, the stock has gained 72.6% to close the last trading session at $22. It is up 53.1% year-to-date.
KRT’s promising outlook is reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Momentum and Sentiment and a B for Quality. It is ranked first in the same industry. To see KRT’s ratings for Growth, Value, and Stability, click here.
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GPK shares were trading at $22.17 per share on Thursday afternoon, up $0.01 (+0.05%). Year-to-date, GPK has gained 0.90%, versus a 13.37% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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