WestRock (NYSE:WRK) deals in four product segments: corrugated packaging, consumer packaging, specialty chemicals, and real estate.
The company is one of the world's largest manufacturers of corrugated packaging, measured by tons produced, according to its latest annual filing. The company is also heavily invested in recycling, which is one of its main sources of resource. Its intention is to manufacture a wide variety of packaging options for customers' merchandising and shipping specifications.
WestRock is one of the largest manufacturers of folding and beverage cartons in the United States. It also produces mailing packages for over-the-counter drugs. Again, the company makes heavy use of recycled material.
The company also sells specialty chemicals derived from sawdust. This division of the company contributed 2.2% of net sales in fiscal 2015, and is a result of a merger, which will be discussed later.
The company plans to spin off the specialty chemicals division in the near future.
Land and Development
The company also now develops property and improves certain tracts of land. This division contributed to just .4% of net sales in fiscal 2015, and is a result of the merger mentioned above.
Weighing Product Divisions
Sales of corrugated packaging to outside customers accounted for 73.5%, 71.8%, and 64.9% of net sales in 2013, 2014, and 2015, respectively. As a result, it's the largest product division of the company. However, the percentage of net sales that corrugated packaging contributes has decreased by 8.6% over the past two fiscal years.
This can be partially explained by growth in the percentage of net sales contributed by the consumer packing division of the company. The consumer packing division has contributed 26.5%, 28.2%, and 32.5% of net sales in 2013, 2014, and 2015, respectively. This represents an increase of 6% over the past two fiscal years.
So, all in all, in 2013 and 2014, the company only manufactured corrugated and consumer packaging. In 2015, these divisions contributed 97.4% of all sales as a result of the new chemical and real estate divisions.
This begs the question: Why does the company want to mingle in chemicals and real estate? The foray into chemicals makes some sense, since the chemicals the company manufactures are created from byproducts of its packaging manufacturing process. For example, the company manufactures chemicals from pine chemicals used in printing inks. But, the business still doesn't make much logical sense. The chemicals business is so far removed from the manufacturing business that the company will probably have to create a whole new marketing division or plan and increase overall manufacturing capability to help this new division grow. And this makes no sense.
If the company is going to enter a new field, it should enter it to win. The opportunity cost of starting a chemical business might seem negligible when looking at the source of the chemicals, but the marketing, packaging, and selling necessary to expand the chemical business and make it profitable could be put to better use making the packaging divisions more robust than they already are.
WestRock plans to spin off its chemical division under the name Ingevity. Hopefully, that results in an overall profit for the business in the future and a decrease in cost.
The real estate division is even more bewildering, since it contributed to less than half of one percent of net sales in fiscal 2015. If the company has extra land from its merger, it should of course either save the land for future development or sell it for a profit, but it seems to be dedicated to developing land, and again, this requires a different kind of marketing, investment, and cost which could be put to better use consolidating the business's footing elsewhere. The land and development division of the business had a $3.4 million loss in 2015 as a result of lower margins.
However, in the big picture, the chemical and real estate divisions are minor inefficiencies in what's already large company.
WestRock was formed in March of 2015, as a result of a merger between Rock-Tenn, which primarily manufactured corrugated and consumer packaging, and MeadWestvaco, a manufacturer of packaging for healthcare, beauty, personal care, and beverage products. Rock-Tenn's manufacturing made up most of the current corrugated packaging division whereas MWV's manufacturing made up most of the current consumer packaging division. The merger explains the decrease in sales percentages of corrugated packaging and the increase in sales percentages of consumer packaging.
The merger makes strategic sense, since both companies are in the same field, but also manufacture slightly different products geared toward slightly different customers.
As a result of the merger, WestRock is worth approximately $8.25 billion, making it the third largest manufacturer of packaging in the United States, with only the International Paper Company and the Ball Corporation having larger market capitalizations.
In addition, Rock-Tenn was also the accounting acquirer in the merger, and as a result, the previous earnings of WestRock are Rock-Tenn's earnings. The earnings and financial data starting in 2015 are those of Rock-Tenn and MWV.
As a result of the merger, annual consolidated net income has increased from $483.3 million to $507.1 million, an increase of 4.9%.
A look at the earnings might seem troubling at first, since the company - which at the time was Rock-Tenn - recorded a consolidated net income of over $700 million in the previous year. This might make it seem like the company has been underperforming for the past two fiscal years, but a closer look at the earnings will paint a different picture. The company had taxes in excess of $200 million in the last fiscal year. But, in the year it recorded $700 million in net consolidated income, it profited from an effective tax rate. This difference is primarily due to changed tax laws in New York as well as some tax revisions from Rock-Tenn's acquisition of Smurfit-Stone.
Overall, especially because of the merger, the company has increased profits and had a strong showing, as shown by the chart below. The mergers helped the company expand its customer base and cast a wider net. In addition, the company has also had a history of increasing income long before the merger occurred.
Furthermore, earnings for companies in the paper and packaging industries tend to be lower in the first quarter as a result of winter weather and its accompanying costs.
WRK Net Income (Annual) data by YCharts
The company also had a strong increase in book value. Cash on hand has increased substantially, and as a result of the merger, so has book value.
WRK Book Value (Annual) data by YCharts
The book value of the company had a slight but definite upward trend as a result of minor acquisitions Rock-Tenn was making. But, as a result of the merger, the book value more than doubled.
Analyzing the book value of a company before and after it merged is superfluous, but it does show that the company has strength in size, and just how much larger it has become.
The company's P/B ratio is a very attractive 0.68.
Restructuring and Acquisitions
Based on the fiscal first quarter call, the continued merger operations are going well, which will only lead to more cost cutting and efficiency in the future.
WestRock also added to its acquisitions with a purchase of SP Fiber, which makes recycled containerboard and kraft and bag paper for $288.5 million. As Seeking Alpha reported, the purchase will be accretive by the second half of fiscal 2016. This is another addition to the company that will only make it larger and more expansive.
Where the Opportunity Lies
The average common stock's price fluctuates 80% during a given year. But, the true value of the underlying business doesn't nearly fluctuate by the same amount. The opportunity with WestRock is due mostly to a recent plunge in prices as well as the company seemingly flying under the radar.
First, let's tackle the price dive. Over the past month, WestRock's stock has fallen by nearly 20% amid worries about paper prices and their impact on the packaging industry. International Paper's (NYSE:IP) price has also fallen, though not to the same degree.
The scare with prices is most probably temporary and, in any case, a dip in price of 20% over the past month and 35% over the past two months is a bit of an overreaction, especially considering the company's performance before and after the merger. The decline in price has been compounded by the market's overall decline in 2016.
WestRock, at the time this is being written, is trading for roughly $32. WestRock's predecessor, Rock-Tenn closed at over $60 on July 1. WestRock does have more outstanding shares (about 20% more), but that doesn't warrant the decrease in price. Considering the merger and the run of earnings and acquisitions stretching back years, the price makes no sense.
Because of the company's size after the merger, it's safe to say that the price dives of resources will have a minimal effect on the company's long-term prospects. And when prices recuperate, large companies are going to be the ones that were the least hurt and have the most to profit from. And, it's important to keep in mind that the continuing restructuring of the company after the merger are only going to bring costs down.
WestRock is a solid buy, especially at its current price. The recent price dive is probably a result of temporarily cheap sector prices as well as general pessimism in the market (which has been widely reported in the media).
There's no reason for this company not to flourish and stay healthy in the future. Packaging isn't going anywhere, and the recent merger as well as the company's aggressive acquisition strategy make the entire business more solid and robust and ready for adversity in the future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.