Waco Recycled Paperboard Startup And Capex Cut Will Improve Efficiency

Key Takeaways

• Planned operational improvements and sustainable innovations are expected to enhance margins, drive revenue growth, and improve financial health.
  
• Share repurchase plan underlines focus on shareholder returns, potentially boosting earnings per share.
  
• Economic pressures and operational challenges, including cost inflation and reduced capacity, threaten revenue and margin stability amidst evolving consumer preferences and global uncertainties.

Catalysts

Designs, produces, and sells consumer packaging products to brands in food, beverage, foodservice, household, and other consumer products in the Americas, Europe, and the Asia Pacific.

• The planned start-up of the Waco recycled paperboard machine in the fourth quarter will enhance operational efficiency and increase capacity, potentially leading to higher margins and increased revenues.
  
• The new $1.5 billion share repurchase authorization demonstrates a commitment to returning capital to shareholders, likely spurring an increase in earnings per share over time.
  
• Innovation sales growth, particularly in sustainable packaging solutions like the Boardio paperboard canister and EnviroClip Beam, is expected to drive revenue growth by at least 2% in 2025.
  
• Regulatory requirements in Europe benefiting beverage multipack demand create a favorable environment for revenue growth in this segment.
  
• The decline in capital spending from $1.2 billion in 2024 to $700 million in 2025, with a further reduction to 5% of sales, is expected to free up substantial cash flow, improving overall financial health and net margins.

Graphic Packaging Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Graphic Packaging Holding's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 7.9% in 3 years time.
• Analysts expect earnings to reach $718.5 million (and earnings per share of $2.63) by about May 2028, up from $620.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $830.1 million in earnings, and the most bearish expecting $621.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, up from 10.7x today. This future PE is lower than the current PE for the US Packaging industry at 20.2x.
• Analysts expect the number of shares outstanding to decline by 1.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

Graphic Packaging Holding Future Earnings Per Share Growth

Risks

• Stretched consumers and high food prices have led to a pullback in spending, which impacts volume growth and revenue negatively.
  
• Input cost inflation, notably in energy and chemicals, is higher than expected and has not been fully mitigated by pricing actions, pressuring net margins.
  
• The closure of older facilities like Middletown reduces production capacity temporarily, which could affect short-term revenue and earnings until new facilities ramp up.
  
• Declining consumer confidence and behavioral shifts, such as the preference for private labels, pose threats to traditional branded product sales and could depress future revenue growth.
  
• Tariffs, regulatory changes, and economic uncertainties in international markets threaten the volume stability and pricing strategies, impacting profitability and revenue.

Valuation

• The analysts have a consensus price target of $26.551 for Graphic Packaging Holding based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $32.9, and the most bearish reporting a price target of just $21.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.1 billion, earnings will come to $718.5 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $22.08, the analyst price target of $26.55 is 16.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.