Whether you think about it or not, packaging is a major market both in the US and globally. Having quality and even attractive packaging is important for a variety of goods and for a number of reasons. One company in this space that warrants some investor attention is Graphic Packaging Holding Company (NYSE:GPK). In recent years, management succeeded in growing the company's top line and its cash flows at an attractive pace. Moving forward, that picture is almost certain to continue. Add in the fact that shares of the company look fairly cheap on both an absolute basis and relative to similar firms, and it should definitely be a company that investors keep in mind when looking for attractive long-term prospects.
According to the management team at Graphic Packaging, the company serves as a leading provider of sustainable, fiber-based packaging solutions for customers in a variety of industries. Its customers include those in the food, beverage, food service, and other consumer products spaces. The company supplies paperboard cartons, carriers, and containers for customers that sell beverage, food, prepared food and drink, and other related products. Other types of uses include household products like dishwasher and laundry detergent, health care products, beauty aids, tissues, papers, air filter frames, and more.
Operationally speaking, the business has three segments that it manages. The first of these is the Paperboard Mills segment. It's also worth noting that this segment includes the eight North American paperboard mills that the company has that produced products aimed for both the Americas and Europe. Based on the data provided, this specific segment produces all of the packaging goods that the company uses internally for its other two segments. During the company's 2021 fiscal year, this segment was responsible for 14.1% of the company's revenue and it more or less breaks even each year.
The next segment is the Americas Paperboard Packaging segment, which includes the company's paperboard packaging, cups, lids, and food containers, that are all sold throughout the Americas. During 2021, this segment was responsible for 69.8% of the company's revenue and substantially all of its profits. The final segment is the Europe Paperboard Packaging segment, which includes the same kind of packaging products but dedicated to the company's European market. This unit was responsible for 13.9% of the company's sales last year. The company also generates about 2.2% of its revenue from its Corporate and Other operations, which include revenues associated with customers in Australia and parts of Asia.
Over the past few years, the management team at Graphic Packaging has done a really good job growing the company's top and bottom lines, though the latter will require some specification. For the top line, revenue expanded during each of at least the past five years, climbing from $4.41 billion in 2017 to $7.16 billion in 2021. Some of the company's growth does come from organic expansion. But it would be a mistake to discount the acquisitions the business has made. Last year alone, for instance, the company made two large acquisitions that required a combined $1.70 billion in cash payments. For a company with a market capitalization of $6.72 billion, that is significant in size.
On the bottom line, things have been a little less pleasant. Net income has bounced all over the map, actually declining from $300.2 million in 2017 to $167 million in 2020. But then, in 2021, profits increased, climbing to $204 million for the year. When it comes to other profitability metrics, the picture is a little clearer. In 2017 and 2018, the company generated significant cash outflows. But then, in 2019, cash flows totaled $666 million. This rose to $825 million in 2020 before dropping to $609 million last year. If, however, we adjust for changes in working capital, the picture looks far more consistent. Cash flow using this approach would have risen from $452.8 million in 2017 to $844 million in 2020. Then, in 2021, it dipped slightly to $838 million. Another cash flow metric to consider is EBITDA. Though it has also been a bit lumpy, the general trend has been positive, with the metric climbing from $707.2 million in 2017 to $1.04 billion last year.
So far, management has already revealed results covering the first quarter of the company's 2022 fiscal year. Sales came in at $2.25 billion. That implies a 36.1% increase over the $1.65 billion generated one year earlier. Net profits have risen nicely, climbing from $54 million in the first quarter of last year to $107 million this year. Operating cash flow did worsen, dropping from $53 million to $18 million. But if we adjust for changes in working capital, it would have risen from $198 million to $258 million. Similarly, EBITDA for the company rose from $240 million last year to $350 million so far this year.
2022 as a whole is slated to be a great year for the company. Some of this can be chalked up to strong demand for the company's products. Higher pricing will also be a factor. However, the aforementioned acquisitions will also come into play. Because of all of these factors, management expects revenue to come in at around $9 billion for the year. Of course, this firm, like many others, is also dealing with inflation. Total inflationary costs are forecasted to hit the company to the tune of between $780 million and $980 million for the year. To address this, the company is executing price actions to the tune of $1 billion.
This all will ultimately have a positive impact on the company's bottom line. For instance, EBITDA is forecasted to come in at between $1.40 billion and $1.60 billion. Using the midpoint as our number, this implies operating cash flow for the year of about $1.26 billion. Meanwhile, earnings per share are forecasted at between $1.75 and $2.25. This would translate to net profits of between $545 million and $695 million, with a midpoint reading of $620 million. However, this seems to exclude around $100 million worth of amortization. That will bring net profits down to about $520 million for the year.
Taking these figures, we can effectively price the company. Using the 2021 results for the company, we can see that it is trading at a price to adjusted operating cash flow multiple of 8. Though this drops to just 5.3 if we use the 2022 estimates. Meanwhile, the EV to EBITDA multiple of the company should be 12. This also drops if we use the 2022 estimates, falling to just 8.4 for the year. To put the pricing of the company into perspective, I decided to compare it to five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 7.8 to a high of 38.7. Using our 2021 results, we find that only one of the five firms is cheaper than Graphic Packaging. But using the 2022 estimates, our prospect is the cheapest of the group. Using the EV to EBITDA approach, the range would be from 7.1 to 43.9. Our 2021 results would result in three of the five companies being cheaper than our target. While the 2022 results would make it such that only one of the five companies is cheaper.
|Company||Price / Operating Cash Flow||EV / EBITDA|
|Graphic Packaging Holding Company||8.0||12.0|
|Sonoco Products Company (SON)||38.7||43.9|
|WestRock Company (WRK)||7.8||7.1|
|Packaging Corporation of America (PKG)||13.6||10.0|
|International Paper Company (IP)||8.9||9.5|
Based on the data provided, Graphic Packaging seems to be an attractive company with a solid operating history. Shares of the business are trading in the range of what you would expect for this space, but that doesn't change the fact that shares look cheap on an absolute basis. Because of this, I would make the case that this makes for a solid ‘buy’ prospect at this point in time, so long as current trends persist.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.