Packaging Gains on E-Commerce Demand Amid Coronavirus Fears
The Zacks Containers – Paper and Packaging industry is poised to grow on e-commerce boom and growing demand for sustainable packaging options amid shrinking paper market. Even though the coronavirus outbreak has adversely impacted the industry by disrupting global packaging-supply chain, and causing shortage of materials and ramp down of few paper mills, the industry participants continue to operate, as packaging products are essential for the distribution of food, beverage and pharmaceutical products. These companies are taking precautionary steps to ensure health and safety of employees and customers, and contain the spread of the virus while adhering to the government’s guidelines.
The number of coronavirus cases across the globe has skyrocketed to 896,450, while the death toll stands at 45,525 per the World Health Organization’s report as of Apr 2, 2020. The United States is currently the worst affected, with 216,912 cases. To contain the spread of the virus, most countries have imposed travel restrictions and other measures, such as constrained movement and quarantines.
Packaging Demand to Aid Growth
The industry’s considerable exposure (more than 60%) to consumer-oriented end-markets, such as food and beverages, and healthcare keeps demand fairly stable across economic cycles. Further, the coronavirus outbreak has led to a surge in demand for food, medicine, medical equipment and other critical products. This, in turn, is aiding the packaging market.
The pandemic has further fueled e-commerce growth as consumers’ demand for online grocery, beverage and pharmaceuticals delivery services have increased following the sweeping travel restrictions imposed by governments. This has spurred demand for containerboard and corrugated boxes. Packaging has gained utmost importance as it has to maintain the integrity and durability of a product, such that it can withstand the complex product-delivery process. According to Statista, global retail e-commerce sales are anticipated to reach $6.54 trillion in 2022 from $3.53 trillion in 2019.
Lower Paper Demand & Increased Digitization a Woe
The virus outbreak has impacted paper consumption in schools, offices and businesses. The packaging companies have, thus, idled their paper-mill operations, reducing paper production. Hence, the current demand-supply imbalance for paper products is a concerning factor for the industry, which has already been reeling under the unfavorable impact of increased digitization. The transition to digital media has been eroding the paper market by reducing demand for printing, coated and uncoated papers. This is one of the major factors, which can hinder paper and paperboard market growth in the near term.
Apart from high raw-material costs, the industry has been impacted by rising transportation costs, chemical and fuel costs. Consequently, the companies have to transfer higher costs to customers, but it might not be always feasible, given the heightening competition. Consequently, these companies are now focusing on reducing costs, improving productivity and in turn, boosting profitability.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Containers - Paper and Packaging industry, which is a 14-stock group within the broader Zacks Industrial Products Sector, currently carries a Zacks Industry Rank #155, which places it at the bottom 39% of 254 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The stocks in the Containers – Paper and Packaging industry have collectively slumped 49.4% in the past year, compared with the S&P 500’s decline of 14%, while the Industrial Products sector has lost 28.1%.
Going forward, increasing demand for sustainable packaging options and eco-friendly packaging solutions are driving the paper packaging market. Demand for sophisticated packaging is on the rise and the industry is constantly striving to meet this by adopting new technology and innovative products, while shifting preference for flexible paper-based packaging, owing to environmental concerns. The industry is also likely to gain from capitalizing on growing global demand for environment-friendly biodegradable packaging materials supported by increasing consumer awareness on environmental issues.
Investors keen on the Containers – Paper and Packaging industry may consider Amcor PLC AMCR, which currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Investors may also keep an eye on Graphic Packaging Holding Company GPK, Sealed Air Corporation SEE and Sonoco Products Company SON. All these stocks carry a Zacks Rank of 3 (Hold) and have positive earnings growth estimates for the current year.
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