WestRock Earnings: Investors Shouldn’t Feel Boxed in by Near-Term Headwinds; Shares Undervalued

No-moat rated WestRock’s WRK fiscal third-quarter results came with few surprises and were largely in line with our expectations. Volumes remained pressured during the quarter as the packaging industry continued to toil with persistent inventory destocking across much of the supply chain. Despite improvements in selling prices during the quarter, net sales declined roughly 7% year over year while the firm’s adjusted EBITDA margin fell 250 basis points. While WestRock faces near-term challenges, we think the company is well positioned to capitalize on sequential improvements in demand and its improving cost structure should provide a runway for margin expansion. As such, we maintain our $55 fair value estimate.

WestRock’s corrugated packaging segment reported a nearly 8% year-over-year increase in revenue, as higher selling prices and the benefit of the Grupo Gondi acquisition more than offset lower volumes in the quarter. That said, shipments were roughly flat sequentially thanks to improving demand in produce and beverage end markets. Additionally, management noted that shipments in July were up midsingle digits from the third fiscal quarter and backlogs were the strongest they’ve seen this calendar year. While the corrugated packaging segment faces near-term pressure, we expect sequential volume improvements and relatively stable pricing through the end of the year.

The consumer packaging business faced another challenging quarter as retailers continued to work through excess inventory and inflationary pressures weighed on consumer demand. Organic sales volumes fell almost 7% year over year, but revenue increased roughly 2% due to higher selling prices and favorable mix in the quarter. While we expect volume improvements in the consumer packaging segment, it’s likely those won’t materialize until 2024 as current inventory management initiatives and softening consumer spending slow its recovery.