All Aboard Containerboard? Not So Fast--It's Still a No-Moat Industry
The market seems smitten with the newfound pricing power in the industry, but it won't last.
The stock prices of major containerboard producers such as International Paper (IP), Rock-Tenn (RKT), and Packaging Corporation of America (PKG) have surged over the past nine months, dramatically outperforming the S&P 500 Index. The cause is largely due to a seemingly improved outlook for industry profitability following a wave of consolidation that reduced capacity and led to a more favorable pricing environment. The industry is attempting to pass through its second price increase for containerboard and boxes in the past nine months, and, based on consensus forecasts for the three companies, we believe the market is assuming continued price increases in the coming years. Though we think the industry is in a better position than it was five years ago, we do not think the changes have contributed to a narrow economic moat for the participants. Consequently, we see a limit to the industry's pricing power in the medium term and consider the shares to be moderately overvalued today.
Industry Consolidation Results in Renaissance
For most of its history, the containerboard industry was highly fragmented and generally lacked the ability to raise prices on customers without support from higher demand or input prices. This allowed independent converting plants to acquire supply from multiple sources and play containerboard suppliers off one another to obtain the best prices.
Todd Wenning does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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