Three Attractive Lumber Stocks

Lumber prices have more than doubled in the last two years. Even though they have corrected significantly off their all-time high of about $1700 in 2021, they are still hovering around $1100 per 1000 board feet, a level that is much higher than the historical average of this commodity. It is thus natural that lumber stocks have attracted the interest of some investors lately. In this article, we will analyze the prospects of three attractive lumber stocks.

WestRock (WRK)

WestRock was formed in 2015 by the merger of Rock-Tenn and MeadWestvaco and is a leading provider of differentiated paper and packaging solutions. In 2021, the corrugated packaging segment and the consumer packaging segment generated 66% and 34% of its total revenues and 71% and 29% of its earnings, respectively.

WestRock does not have any control on the global supply of paper products. Consequently, it is vulnerable to an increase in the production capacity of its competitors. This helps explain the high cyclicality of this business and the volatile performance record of WestRock. Since its formation in 2015, the company has not managed to grow its earnings per share, partly due to the impact of the pandemic on its business.

Photo by Oliver Paaske on Unsplash

However, thanks to the massive distribution of vaccines worldwide and the immense fiscal stimulus packages offered by most governments in response to the pandemic, WestRock is currently recovering strongly from the pandemic. This recovery is clearly reflected in the latest earnings report of the company.

In the first quarter of fiscal 2022, WestRock enjoyed pent-up demand for its products in all its markets and thus it was able to implement material price hikes, which more than offset the effect of the inflation of the cost of raw materials and some supply chain disruptions related to the pandemic. As a result, WestRock grew its revenue by 12.5% over the prior year’s quarter, to a record level, and its adjusted earnings-per-share by 7%, from $0.61 to $0.65, thus exceeding the analysts’ consensus by $0.01.

WestRock has missed the analysts’ consensus in only 3 of the last 27 quarters. Thanks to strong momentum in North American box shipments and the recent price hikes, the company raised its quarterly dividend twice last year and is on track to post record earnings per share this year.

International Paper (IP)

International Paper is a leading global producer of renewable fiber-based packaging, pulp, and paper products. It has manufacturing operations in North America, Latin America, Europe, North Africa, Russia and India, and serves more than 25,000 customers in 150 countries.

The company is currently facing a strong headwind from a surge in the cost of raw materials and energy. In the most recent quarter, the company posted flat sales volumes sequentially but it grew its revenues 3% thanks to recent price hikes in corrugated boxes and containerboard. However, due to the surge in the cost of raw materials and energy and increased maintenance activity in the production of cellulose fibers, its earnings per share slumped 29%, from $1.10 to $0.78, and missed the analysts’ consensus by $0.11. It was only the third earnings miss of the company in the last 22 quarters. Management expects short-term pressure due to supply chain issues related to the omicron variant but expects the demand for its products to remain strong and the earnings per share to grow this year.

Just like WestRock, International Paper has exhibited a volatile performance record due to the cyclical nature of its business. It has also proved vulnerable to recessions. In the Great Recession, its earnings per share plunged 60%. In the recession caused by the pandemic in 2020, International Paper saw its earnings per share decrease 37%.

On the bright side, the sales of containerboard have received a boost in the last two years thanks to robust sales in grocery channels and e-commerce. In addition, the pandemic has begun to subside and thus International Paper faces pent-up demand. Overall, we expect International Paper to grow its earnings per share at a 4% average annual rate over the next five years.

Amcor plc (AMCR)

Amcor is one of the world's most prominent designers and manufacturers of packaging for food, pharmaceutical, medical, and other consumer products. It was formed in 2019 with the merger between two packaging companies, U.S-based Bemis Co. Inc. and Australia-based Amcor Ltd. The company produces environmentally-friendly packaging, which is lightweight, recyclable, and reusable.

The emphasis of Amcor on recyclable and reusable products should appeal to conscious end-users, while the merger with Bemis has greatly enhanced the prospects of the company in developing regions. Moreover, the merger has markedly increased the size of Amcor and thus its pricing power with its suppliers.

Amcor currently enjoys strong demand for its products and thus it has raised its prices significantly. In the first quarter of fiscal 2022, the company grew its revenue 10% over the prior year’s quarter, primarily thanks to a 9% increase in its prices, which more than offset higher raw material costs. As a result, Amcor grew its earnings per share 10% and is on track to meet or exceed its own guidance for earnings-per-share growth of 7%-11% this year.

It is also worth noting that Amcor is offering an attractive 4.2% dividend yield. Given the multi-year dividend growth record of its two predecessors, its solid payout ratio of 59%, and its strong BBB credit rating, investors can lock in the 4.2% dividend of the stock and rest assured that the dividend will keep rising for years.

Final Thoughts

The above three stocks are highly cyclical and hence investors should select their entry point carefully. With that said, these stocks have incurred a material correction in recent months and hence they have become attractive from a long-term perspective. Therefore, investors should consider purchasing them at their current prices or at slightly lower levels.

Disclosure: The author does not own any stocks mentioned in the article.

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