Coronavirus-Led Demand for Products, E-Retail Aids Packaging

The Zacks Containers – Paper and Packaging industry is poised well to grow on steady demand for food, beverage and health-care products amid the coronavirus pandemic, as packaging is an essential element for the distribution of these products. Moreover, industry players will gain from the booming e-commerce activities as customers are spending more time indoors. Apart from this, rising demand for eco-friendly packaging options will stoke growth. However, lower paper demand, pandemic-induced disruption in the global packaging-supply chain and shortage of materials are headwinds.

Demand for Critical Products & E-Commerce to Drive Growth

The industry’s considerable exposure (more than 60%) to consumer-oriented end markets, such as food and beverages, and healthcare, keeps the demand for packaging applications fairly stable across economic cycles. The coronavirus crisis has led to a surge in demand for essential products, such as food, medicine, medical equipment and other critical products. This, in turn, is supporting the packaging market.

Packaging plays a crucial role in the e-commerce market as it has to maintain the integrity and durability of a product to withstand the complex product-delivery process. The pandemic has fueled e-commerce growth as consumers’ demands for online grocery, beverage and pharmaceuticals delivery services have increased following the stay-at-home orders imposed all over. Hence, rising e-commerce sales has led to surge in demand for protective packaging solutions.

Industrial Demand to Buoy Packaging Market

The industry’s few end markets, including general manufacturing and transportation, have started to rebound on signs of economic recovery from the coronavirus crisis. Per the Institute for Supply Management, the U.S. Purchasing Managers’ Index came in at 52.6% in June, up from the May reading of 43.1%. After three consecutive months of contraction, the PMI reading has gone above 50%, which denotes expansion. According the Federal Reserve, industrial production rose 5.4% in June following the 1.4% increase in May. In China, the official NBS Manufacturing PMI was 50.9 in June, marking the fourth consecutive months of increase in factory activity. The Eurozone Manufacturing PMI came in at 46.9 in June, above the expectation of 44.5 and previous month’s 39.4. These numbers reflect pick up in manufacturing activities across the globe, which will drive packaging demand in the near term.

Eco-Friendly Packaging to Aid the Industry

Rising demand for sustainable packaging options and eco-friendly packaging solutions will support the packaging market in the days to come. Demand for sophisticated packaging has been shooting up, and the industry is constantly striving to meet the same by adopting new technology and innovative products. It is also likely to gain from the growing global demand for environment-friendly biodegradable packaging materials, backed by customers’ increasing awareness over environmental issues. Moreover, rapid urbanization and the rising purchasing power in Asia, particularly China, India, and Southeast Asia, will spur demand for packaging in the upcoming period.

Few Concerns Over End-Market Demand

Although the food and beverages market are rapidly growing across the globe, parts of these markets, including food services and restaurants, have been affected significantly by the pandemic. Closures of food outlets have thwarted demand for food-grade paper packaging products. In addition, the coronavirus crisis has impacted paper consumption in schools, offices and businesses, hurting paper demand. This is a concern for the industry, which has already been reeling under the unfavorable impact of increased digitization.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright 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 #92, which places it at the Top 37% of more than 250 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 declined 6.4% in the past year, as against the S&P 500’s growth of 7.9%, while the Industrial Products sector has lost 0.8%.

Backed by promising growth prospects, investors keen on the industry may consider Graphic Packaging Holding Company GPK and Berry Global Group, Inc. BERY, both currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Graphic Packaging’s current-year earnings is pinned at 96 cents, indicating year-over-year growth of 10.3%. The company has a trailing four-quarter earnings surprise of 9.6%, on average.

The Zacks Consensus Estimate for Berry Global Group’s fiscal 2020 earnings is pegged at $4.08, suggesting a year-over-year increase of 19.6%. It has a trailing four-quarter average earnings surprise of 6.6%.

Investors might consider keeping an eye on Amcor plc AMCR and Brambles Limited BXBLY, both of which carry a Zacks Rank of 3 (Hold), at present and have positive earnings growth estimates for the current year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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