- WRK should see the benefits of its transformational and streamlining efforts in the form of continued strong growth.
- It has an aggressive share repurchase program and pays a well-covered and growing dividend.
- Recent share price weakness has made this an attractive stock for potentially strong long-term returns.
Market volatility is a value investor's dream, as buying stocks when they are irrationally priced is a key driver for market-beating returns. It's important, however, to carry a well-diversified portfolio as one can never predict when the unexpected will hit any one sector. As in the words of Sir John Templeton, "the only investors who don't need to diversify are those who are 100% right all the time."
This brings me to the growing industrial firm, WestRock ( WRK ), which is trading close to its 52-week. As shown below, WRK now sits well its 52-week high of nearly $55 achieved as recently as May. In this article, I highlight what makes WRK a good buy for those who prize growth and income, so let's get started.
Why WRK?
WestRock is a paper and packaging products company that supports clients around the world, with operations North and South America, Europe, Asia, and Australia. The company has a diversified product mix with corrugated packaging accounting for approximately 60% of sales, followed by consumer packaging (15%), and paper and recycling (25%). In total, WRK serves over 25,000 customers in various end-markets including food and beverage, home improvement, e-commerce, and healthcare.
The company has a long runway for growth as global demand for corrugated packaging is forecast to increase 3-4% annually through 2025. This growth will be driven by continued e-commerce penetration as well as underlying economic fundamentals such as population and income growth. I also view WRK as being a consolidator in its fragmented industry, as it has a solid history of growth through acquisitions.
WRK has continued to demonstrate impressive growth, with net sales up 21% YoY to $5.4 billion in the second quarter, driven by robust 15% and 35% growth in Paper and Packaging sales, respectively, due to increased demand and price increases. Importantly, WRK is not growing at the expense of margins, as adjusted EBITDA grew by a faster 33% YoY. This increased profitability flowed to the bottom line, as adjusted EPS grew by an impressive 117% YoY to $1.17.
Looking forward, WRK should see the benefits of its transformational and streamlining efforts, as noted by management during the recent conference call :
We've been making significant progress in our efforts to transform WestRock into the very best paper and packaging company. We have aligned our mills into one organization and updated our operating segments to provide increased transparency and better reflect how we manage our business.
We've established a global supply chain organization to reduce costs and drive efficiencies. We've launched the WestRock operating system to standardize reporting and drive greater productivity and we have completed a strategic review of our assets, taking our first step to rationalize our portfolio and drive improved return on invested capital.
Nonetheless, WRK isn't immune to risks of a global slow down and cost inflation, as management expects higher energy, freight, and labor costs, which could weigh on margins in the near-term. However, WRK maintains a strong capital position to withstand near term adversities, as it has $3.2 billion of liquidity, comprised of cash on hand and availability under its long-term committed credit facilities. WRK's net debt to adjusted EBITDA ratio now sits at 2.34x, and management expects to achieve a leverage ratio in the 1.75-2.25x range.
Moreover, WRK plans aggressive share buybacks including $700 million over the past 12 months, and $210 million so far this year. The board recently authorized another 25 million share repurchase program, representing 10% of WRK's outstanding float. I also see potential for WRK's dividend to return to its pre-pandemic rate, as it comes with a low 24% payout ratio, and has been raised by 25% since the start of last year.
I see value in WRK stock at the current price of $41.33 with a forward PE of just 8.3, sitting well below its normal PE of 14.4 over the past decade. Sell side analysts estimate double-digit EPS growth over the next 4 quarters, and have a consensus Buy rating with an average price target of $54.77. This translates to a potential one-year 35% total return including dividends.
Investor Takeaway
I believe that WRK is a high-quality company with a long runway for growth, trading at an attractive valuation. The company's recent operational improvements position it well to capitalize on continued global demand growth for corrugated packaging. The company is also planning aggressive share repurchases and pays a well-covered and growing dividend. WRK appears to be attractively valued at present for potentially strong long-term returns.
For further details see:
WestRock: Buy This Growth Stock On The Cheap