Government bans on plastic are sweeping the globe, and that is music to investors’ ears… if they know how to take advantage.
Today, we’ve got a stock that could return an 85% gain thanks in part to new regulations.
On Dec. 19, officials from the 28 countries in the European Union unanimously agreed to ban a variety of single-use plastics. The move comes in the wake of predictions that by 2050, our oceans will be filled with more plastic than wildlife.
Regardless of what anyone thinks about conservation of marine life, it becomes a serious problem for humans when the plastic dumped into the ocean contaminates the seafood they eat.
That’s why the war on plastic won’t end anytime soon. More and more governments are making moves to rid their jurisdictions of plastic bags, straws shopping bags, and all plastic packaging in general.
Now, smart investors are positioning themselves to profit from it by investing in an alternative.
That alternative is paper. Simple, reliable, versatile paper, which has been around for more than 2,000 years.
This company is already the leading paperboard packaging producer in the United States across multiple varieties. Plus, it’s making inroads in Europe, where producers are switching from plastic to paperboard in anticipation of future regulations.
Because of the trend away from plastic, the paperboard packaging market is growing significantly faster than the global economy. Global Market Insights reports that this segment has a compound annual growth rate (CAGR) of 7.5% and will hit $240 billion by 2024.
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Even the plastic industry’s biggest stakeholders are throwing in the towel in this particular fight. In December 2017, Clare Goldsberry wrote on the plastic industry site Plastics Today that, when it comes to single-use plastics and food and beverage containers, “perhaps it would be better to cede this market to the paper/paperboard industry.”
With the opposition rolling over, this paper leader is ready to bank an 85% gain.
As Producers Move from Plastic, This Is the Company They Turn To
Based in Atlanta, Graphic Packaging Holding Co. (NYSE: GPK) has been making paper products since 1992. Its expertise in delivering quality, eye-catching packaging has earned it a client list that’s a who’s who of recognizable brand names.
The list goes on from the world’s best-known makers of beer, coffee, pet food, condiments, and consumer products of all types.
This Fortune 1000 company now has more than 17,500 employees at dozens of locations all across North America. It leads all U.S. producers of folding cartons with a 37% market share, and paper cups with a 24% share.
But it’s not just focused on the United States…
Graphic Packaging also has a presence in Brazil, and since 2012, has been building a strong presence in Europe. That includes folding carton plants in the UK, Ireland, Germany, France, the Netherlands, and Spain.
That European footprint was advantageous, for example, when UK-based dog food producer Butcher’s wanted to swap out its shrink-wrap packaging for a more sustainable option. GPK stepped in with a cardboard package that was not only better for the environment, but also did a better job of showing off the Butcher’s brand with its graphic design.
A big reason GPK has a leg up on its competition is its vertical integration. In addition to its mills producing both virgin and recycled paper, the company has more than 60 converting plants. Converting is the process of taking the unwieldy sheets that come from the mill and turning them into usable products.
Combine that with the company’s ability to find innovative solutions for its clients – such as the microwavable packaging you might find when you buy frozen pizza – and it’s no wonder so many big names keep coming back to Graphic Packaging’s low-cost, one-stop packaging operation.
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Considering the trends in today’s business environment, it certainly doesn’t hurt that GPK is committed to sustainability. In 2017, it finished the first phase of its “Sustainability Vision,” which saw it reduce greenhouse gas emissions by 30% over eight years and increase paper recovery by 65.8%.
The company hopes to further that progress in its next phase, which will last through 2025. That will bode well as both consumers and governments demand environmentally friendly practices from manufacturers in the coming years.
If none of this sounds as revolutionary as a new tech gadget or miracle drug, that’s actually a selling point for this stock. While the market has been chasing shiny objects, it has overlooked the major profit potential of GPK.
Now Is the Time to Buy GPK
GPK hasn’t recovered yet from the October market plunge. Shares are trading at around $10.50, compared to nearly $15 in late September.
That’s in part because of a slight earnings miss in its most recent quarter. But earnings per share (EPS) was still up 22% from the year before. And the company is still on pace to finish its fiscal year with an impressive 48% EPS growth.
Those numbers would be impressive for a tech company in Silicon Valley. For a paper company operating in one of the lowest-risk sectors of the economy, it’s exceptional.
That’s one reason why eight out of 10 analysts tracked by FactSet call Graphic Packaging a “Buy” or “Overweight.” The average price target is more than 40% above its current price, with Mark Connelly at Stephens Inc. calling for an 85% rise.
Those targets are in line with GPK’s valuation metrics. The stock’s forward price/earnings-growth (PEG) ratio of 0.86 comes in at a 40% discount compared to the industry average. The price-to-book and price-to-sales ratios are currently at a 54% and 57% discount, respectively.
Plus, this stock gives shareholders a nice dividend yield of 2.75%.
In short, Graphic Packaging gives you all the reliability and security you’d expect from the biggest paper packaging company in the nation. But with the tide shifting away from plastic, you can also get the big gains you’d expect from a more speculative play.
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