WestRock Earnings: Favorable Pricing Drives Growth Amid Softening Demand; Shares Remain Attractive

No-moat-rated WestRock WRK reported fiscal second-quarter results that were largely in line with our expectations. Revenue decreased roughly 2% year over year as strength in the company’s corrugated packaging segment was more than offset by lower sales in global paper. Volume remained pressured in the quarter as inventory destocking persisted, but higher selling prices provided some relief. Management noted sequential improvements throughout the quarter and into April as destocking trends appeared to moderate. Nevertheless, WestRock faces a challenging second half of the fiscal year as heightened economic uncertainty is likely to weigh on end-market demand. We’ve decreased our fair value estimate to $55 per share from $58 to reflect a slight reduction in our near-term revenue and profitability assumptions.

WestRock’s corrugated packaging segment reported a roughly 13% increase in revenue year over year thanks to higher selling prices and the benefit of the Grupo Gondi acquisition. This more than offset lower volume caused by moderating demand and unfavorable moves in consumer spending. Despite continued cost inflation, the segment posted a 15.5% adjusted EBITDA margin, up roughly 130 basis points from a year ago. While we think WestRock will benefit from higher prices and a slowdown in inventory destocking, volume is likely to remain pressured through the year.

During the fiscal second quarter, WestRock recorded a goodwill impairment of roughly $1.9 billion in its global paper and corrugated packaging segments. Management said this was largely due to moderating demand and worsening macroeconomic conditions. While it’s clear that WestRock overpaid for previous acquisitions, market conditions have weighed heavily on the performance of those assets in the last year. However, we do not think this reflects on WestRock’s leadership team, as a majority of its members joined the company in the last few years, after the two large acquisitions in 2019 and 2017.