You'd think packaging-company stocks would be going nuts given the amount of e-commerce in this country. Somebody has to make all of those boxes, air pillows and packing peanuts, right?
It's true that FedEx (FDX) and UPS (UPS) have certainty benefited from e-commerce the last five or six years. But what about everybody else?
Well, while IBIS World Research says that the cardboard box-and-container industry is a $62 billion business that employs over 130,000 people in America alone, U.S. Corrugated -- the largest box maker -- is privately held.
And because boxes are heavy and bulky, they're unprofitable to transport large distances. So, most boxes used domestically are made locally by more than 2,100 independent outfits scattered throughout America. Corrugated producers generally sell within a 150-mile radius of their plants and compete with other local providers.
Among public companies, Packaging Corp. of America (PCA) and International Paper (IP) are the two purest stock plays in the cardboard-box industry.
Market watchers generally view IP as the largest publicly traded U.S. corrugated maker, while PCA is North America's fourth-biggest cardboard maker and No. 3 white-paper producer.
But while it sounds like e-commerce would be a big part of the corrugated-box market, it's actually not. Food, beverage and agricultural products actually account for 40% of America's corrugated-box consumption, according to the Fiber Board Association.
In fact, the No. 2 consumer of boxes is paper. That's right -- 21% of our corrugated-box consumption simply goes toward transporting reams of paper around. Retail use represents just 17% of the market.
For investors, the box industry's commodity nature and capacity fluctuations also make playing the sector extremely difficult. The market for containerboard is weak right now, with sluggish box demand, high inventory and new supply holding prices down. The strong U.S. dollar hasn't helped, with export demand slowing to a crawl.
Here's a deeper look at the sector's two public plays:
IP expects to report its latest quarterly results on Oct. 28.
The stock recently bounced higher on the news of a dividend hike and some capacity shutdowns, but analysts expect revenue to fall about 3% for 2015 as a whole to $22.9 billion.
On the plus side, margins are rising thanks to cost controls and declining energy expenses. International Paper's EBIT margins increased from 8.2% in 2012 to 10.7% in 2014, and they're expected to hit 12% by 2016's end.
Analysts expect Packaging Corp.'s revenues to rise less than 1% in 2015 and around 2% next year.
PKG acquired Boise Inc. in 2013, and it's continuing to benefit from that merger. The deal boosted PKG's linerboard capacity by 40%, while post-merger expense reductions are providing a tailwind to PKG's results. So are weak commodity costs and a decline in energy costs.
The Bottom Line
While both stocks are off of recent lows, I'd be afraid to buy either one right now.
Many investors see both companies as value plays, but I'm personally avoiding them. Sluggish demand and virtually no revenue growth make the box business frightening to me.