On Jan. 1, Los Angeles became the largest city in the U.S. to
ban plastic shopping bags in grocery stores and other large
retail venues that sell perishable foods.
Now a bill in the state legislature wants to make a
plastic-bag ban statewide.
Other cities in California and elsewhere already have bans, or
are considering them.
The war on plastic bags, petroleum-based products that foes
say fill landfills and collect in oceans, may benefit a leading
alternative: good old biodegradable paper bags.
Even without a legal mandate, a growing number of merchants
have been rolling out the welcome mat for paper,Whole Foods (
) and Trader Joe's among them.McDonald's (
) is switching to paper cups from polystyrene for hot coffee in
its thousands of U.S. units.
Does this mean old-school paper products are making a
"It's not a dying industry," said Cathy Foley, vice president
of the American Forest & Paper Association, or AF&PA.
"We're growing. We're innovating. We're putting sustainable
products into the marketplace."
Newsprint may be fading in the digital age. But contrary to
popular opinion, the Web has not only failed to kill off the
paper and paperboard industry, it is, in places, creating
) might destroy the need for brick-and-mortar retail, but it
doesn't destroy demand for boxes," said Stephen Chercover, a
paper packaging analyst with D.A. Davidson & Co. "It might
enhance demand for boxes."
Most companies that make boxes and packaging products are
found in IBD's paper and paper products group. The group's 21
stocks collectively climbed 10% year-to date through Thursday,
logging a 42% gain over the past 12 months. That puts the group
at No. 23 among 197 industry groups.
Its companies range from the century-old giantInternational
Paper Co. (
), with nearly $30 billion in annual revenue, to the $2 billion
in revenueKapstone Paper and Packaging Corp. (
), formed in 2005.
Kapstone specializes in unbleached heavy kraft wrapping and
packaging paper and corrugated packaging.
Other top performers in the 21-member group includePackaging
Corp. of America (PKG) andGraphic Packaging Holdings (GPK).
The U.S. paper business was long its own worst enemy, chasing
boom-bust cycles that crippled profits. Over the past decade,
consolidation and inventory management have been game
"It was a fragmented industry that would compete away strong
returns," Chercover said. "Now that you've got a much more
consolidated industry, there's no hurry to ruin the party by
adding capacity. Demand has not been exceptional, but supply has
been matching demand and that has led to stable pricing with an
Less excess inventory has meant firmer prices, Chercover says,
which translate to better profits and less cyclicality.
In another piece of industry strategy, several newsprint
plants have converted to containerboard production. They've had
varying degrees of success, Chercover says.
"One of the things people fear is that desperate newsprint
producers will convert and spoil the party," he said. But
conversions haven't yet had much of an impact on the
consolidating paper industry, he added.
That could change. Capacity increases due in part to newsprint
conversions may be a factor in holding back containerboard price
increases this year, analyst Adam Josephson of KeyBanc Capital
wrote in a recent research note.
Almost all the major players have been acquisitive in recent
In 2011, Georgia-basedRock-Tenn (RKT) acquired Chicago's
Smurfit-Stone Container in a $3.5 billion takeover. The combined
company became the No. 2 North American producer of
containerboard and the No. 2 producer of coated recycled
(International Paper is the top containerboard maker. Graphic
Packaging leads coated recycled board segment.)
Rock-Tenn is still on the move, announcing on March 3 it would
buy the Simpson Tacoma Kraft Paper Mill in Tacoma, Wash.
In 2012, Tennessee-based International Paper bought corrugated
packaging and building products company Temple-Inland in a deal
valued at $4.5 billion.
That same year, Georgia-based Graphic Packaging, which
provides packaging to food, beverage and consumer-product
companies, bought two European carton operations.
Packaging Corp. of America acquired Boise in October, making
it the fourth-largest producer of containerboard and corrugated
products in the U.S.
The deals have often come with immediate benefits.
In July, Kapstone paid $1 billion for Longview, Wash.-based
Longview Fibre Paper and Packaging, which makes containerboard,
specialty kraft papers and corrugated products. Longview added
$440 million in revenue and $160 million in adjusted EBITDA in
the five and a half months it was part of Kapstone in 2013.
"Clearly the Longview acquisition was the key driver of our
improved results," Chief Financial Officer Andrea Tarbox said in
the Q4 conference call. "Longview has been highly accretive from
Sunsetting 'Black Liquor' Credits
Kapstone's earnings in the quarter spiked 221% from the
earlier year to 45 cents a share.
Profit-fueling acquisitions are especially welcome now that
federal regulators are winding down the "black liquor" energy tax
credits. The subsidy boosted profits among paper makers beginning
in 2007, allowing tax credits for producers that used pulp-wood
processing byproduct as fuel to generate in-house
Kapstone's federal cash tax rate for 2013 was only 2%. But as
Tarbox said in the call, "I'm afraid, though, that those days are
Acquisitions have played a big part in building cash flow,
which in turn is helping to pay off debt and return cash to
shareholders or buy back shares.
Packaging Corp., which reported a 60% surge in Q4 earnings,
said strong cash flow has allowed it to pay down $150 million in
debt since it acquired Boise five months ago. Synergies from the
merger were stronger than expected and realized sooner than
Meanwhile, producers haven't been averse to taking downtime to
keep supply and demand in balance. In its December ending
quarter, Rock-Tenn came in below views as weaker demand led to
downtime at containerboard mills.
But prices rose by $9 per ton from the prior quarter and $65
from a year earlier, noted KeyBanc's Josephson.
By the second half of December, demand had improved.
Management said in its late January report on the quarter that
demand was firming across its markets. Its stock shot up nearly
6% on Jan. 29 despite the miss.
But it is Kapstone that is KeyBanc's "favorite idea" within
the containerboard sector. That's because the well-managed firm,
wrote Josephson, won't likely have to take much, if any,
downtime, unlike significant downtime taken by some of its larger
peers in 2013, International Paper included.
Also, noted Josephson, Kapstone will likely de-lever quickly
from its Longview investment, possibly allowing it by the end of
2014 to be in shape again to make another "highly accretive
Paper and paper packaging is hardly an explosive growth
industry. Demand tends to grow at about half the rate of gross
domestic product, Chercover says. After all, not everything comes
Worldwide demand for paper and paperboard is growing a little
more than 2% on average, according to AF&PA.
That's spurred in part by rising incomes in developing
nations, which in turn increase demand for consumer products.
Think tissue paper and a multitude of other goods that come in
cardboard containers, such as milk, cereal, pharmaceuticals and
"Think of all those things in a paper package. And all those
things are shipped in corrugated boxes," AF&PA's Foley
The U.S. exported about 20% of the paper and paperboard it
produced in 2013, according to AF&PA.
Tissue-paper production rose 3.7% in 2013, followed by
containerboard at 1.2%, the trade group said.
Containerboard is used to make the big cardboard and
corrugated boxes that carry big-ticket consumer goods such as
washing machines and refrigerators.
"We think demand (for containerboard) will improve as
manufacturing comes back to these shores and the housing recovery
moves forward," said Chercover.
Not surprisingly, output of newsprint and writing paper has
Boxboard production used for smaller boxes for such things as
cereals and cosmetics has been relatively flat the past few
years. But it was up 0.5% in 2013.
"Containerboard and tissues are the best grades to be in. They
don't have secular challenges from iPads, iPods and computers,"
Chercover said. "An iPad destroys demand for newsprint, but it
doesn't destroy demand for tissues."
Boxboard demand is seen improving a little this year.
"A lot of people look at box shipments as one barometer of how
the economy and manufacturing are doing," Foley said, noting that
big brown shipping boxes hold everything from food to
In his recent research note, Josephson said KeyBanc doesn't
expect "much more" than 1% box-shipment growth this year. But a
1% pickup, he wrote, would be "meaningful" and likely alleviate
the need for producers to take downtime.