Industry At A Glance - Packaging

By Stephen D. Simpson, CFA | August 31, 2011 AAA

Packaging is scarcely ever noticed, but it is everywhere. A quick trip to the supermarket or pharmacy will show not only the ubiquity of packaging products, but the wide scope of form and function that is available to food, beverage, personal care and healthcare companies. There is certainly a cyclical aspect to the packaging industry and input costs are always significant, but investors may want to give this industry more than just a passing thought. There are certainly some interesting companies out there today and some of these stocks could be interesting at current values.

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Ball Corp (NYSE:BLL)
Ball Corp is quite simply the world's largest metal beverage container manufacturer, with about 40% share (rivals Crown Holdings (NYSE:CCK) and Rexam have roughly 20% share each). Ball's customer list is largely a roster of who's who in the beverage industry - soft drink makers like Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP), as well as brewers like Anheuser-Busch InBev (NYSE:BUD). Ball Corp certainly has some vulnerability to higher metal prices, but the company's market position is such that it can pass on at least some of this to its customers. The bigger threat to Ball Corp may be substitution, as plastic containers make further inroads into the beverage sector.

Bemis (NYSEBMS)
Bemis is a flexible packaging specialist, getting about 70% of its revenue from the food market. It is another example of a packaging company that continues to innovate and introduce new products - new packaging options for condiments and frozen pizza are not going to double the company's revenue or change the world of food as we know it, but these incremental innovations help preserve the company's margins and market share. The company has good exposure to the fast-growing Latin American food industry and its new FreshCase meat packaging films should help offset higher resin and material costs.

MeadWestvaco (NYSE:MWV)
MeadWestvaco is an interesting packaging company. A large part of the company's business is pretty standard commodity packaging fare - bleached paperboard and kraft paperboard - but the company has gotten been active over the past few years in divesting commodity businesses and acquiring some interesting value-added products. In particular, investors should be interested in MWV's dispenser line - pumps, sprayers and similar dispensers for the health, beauty, food and personal care markets. MeadWestvaco also has an emerging specialty chemicals business (which uses by-products of papermaking like sawdust) and extensive land holdings.

Rock-Tenn (NYSE:RKT)
Rock-Tenn is a manufacturer of paperboard, containerboard and corrugated paper packaging. While this is definitely a commodity business, Rock-Tenn's advantage comes through its superior operating cost structure - Rock-Tenn is one of the lowest-cost producers in the market (if not the lowest-cost). The company also recently completed a major deal for Smurfit-Stone and if the company can integrate SSCC's facilities and bring them down to the same cost structure, it will pay off meaningfully for investors. However, demand for Rock-Tenn's products is economically sensitive and a slowdown in the North American economy will mute its pricing power.

Sealed Air (NYSE:SEE)
Everybody knows about Bubble Wrap, but Sealed Air is a lot more than that. Sealed Air is an innovator in packaging materials, having developed well-known products like Instapak, PolyCap, Jiffy and Cryovac. Moreover, the company continues to innovate in its existing product lines - including a new, thinner Cryovac film that offers similar performance. Sealed Air is making a major acquisition by buying Diversey and expanding into the chemical cleaning business. This is a risky transaction as it is far removed from Sealed Air's traditional business, but the shares could be significantly undervalued if that works out.

Other Names to Consider
Aptar (NYSE:ATR) is a leader in product dispensers, being the largest supplier of closures, aerosol valves and pumps for personal care products (it supplies the closure device for Kraft's (NYSE:KFT) MiO containers). Aptar has been especially good at reusing technologies across its platforms, and the pharmaceutical business produces high margins.

Investors interested in packaging should also take a look at the likes of the aforementioned Crown Holdings, Greif (NYSE:GEF) (a leader in industrial packaging products like steel drums and multiwall bags) and Silgan (Nasdaq:SLGN), an especially well-run maker of metal containers. (For additional reading, take a look at our Industry Handbook Tutorial.)

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