Jan. 9 (Bloomberg) -- Makers of corrugated boxes will probably see a pick-up in demand for their products as recent gains in manufacturing indicate the U.S. expansion will be sustained in 2013.
Investors can look to companies such as International Paper Co. and Rock Tenn Co. for a gauge on “economic momentum” when they report quarterly earnings later this month and next, according to Alan Gayle, senior strategist at RidgeWorth Capital Management, which oversees about $47 billion. “These industry statistics help to provide really valuable color" to supplement broader economic indicators, he said.
The Institute for Supply Management’s manufacturing index rose to 50.7 in December from a three-year low of 49.5 the prior month, based on figures from the Tempe, Arizona-based group. The index has been above 50 for three of the past four months. Readings below 50 signal a contraction.
This index has a “good relationship” with information on industry box shipments from the Fibre Box Association in Elk Grove Village, Illinois, said Steve Chercover, senior vice president and senior research analyst in Lake Oswego, Oregon, at D.A. Davidson & Co. That’s because the ISM’s “broad” survey is a leading indicator of items that end up in such containers -- including consumer nondurables such as food and paper products.
The strengthening ISM index may signal a reversal in slumping demand for corrugated containers.
Box shipments fell 1.2 percent on an average-week basis in November from a year earlier, following a 2.1 percent decline the prior month, based on data from the association. December numbers will be released later this month.
Norcross, Georgia-based Rock Tenn and Packaging Corp. of America plan to announce earnings Jan. 22, followed by International Paper, in Memphis, Tennessee, on Jan. 29. The consensus estimate for Lake Forest, Illinois-based Packaging Corp. is about 62 cents a share on an adjusted basis, up 54 percent from a year ago.
Fibre Box figures have been “hovering around zero” in its past six reports, while the ISM index has averaged 50.5 -- a reflection of the “sluggish” economy, Chercover said. Still, he’s optimistic that shipments will “pick back up.”
These “barometers of manufacturing activity” began to weaken in June as concern increased about the so-called fiscal cliff: tax increases and federal spending cuts due to take effect early this year, said Malcolm Polley, who manages $1.1 billion as chief investment officer at Stewart Capital Advisors LLC in Indiana, Pennsylvania. As investors look for more clarity about the strength of the U.S. recovery, “data from companies on the ground help to build a mosaic.”
While the most recent ISM survey was encouraging, investors also should pay close attention to comments from executives, “which have often been prescient, or at least very indicative of what’s going on,” Chercover said.
Along with “seasonally softer demand” in International Paper’s corrugated-box business, the company saw “overall slow growth in North America and a lot of the markets we compete in around the world,” John Faraci, chairman and chief executive officer, said on an Oct. 25 conference call. As a result, “our packaging businesses were a little slower.”
“These companies have their fingers on the pulse of manufacturing in the U.S. and abroad” because, as the primary producers of new boxes worldwide, they’re “beneficiaries or victims of an economic recovery or contraction,” said Chercover, who maintains “buy” recommendations on International Paper and Rock Tenn. “They don’t tell you what you want to hear, they tell you what they’re seeing.”
The compromise budget Congress passed and President Barack Obama signed into law last week may not be enough to engender confidence, Polley said. The deal, which averted income-tax increases on most Americans and delayed automatic spending cuts until March 1, “kicked the expenses down the road,” making it “difficult for businesses to make plans when they don’t know what the rules will be.”
In addition, “broader indicators of factory output, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, continued to be subdued at levels consistent with only small gains in production in the near term,” according to the minutes for the December meeting of the Federal Reserve’s Open Market Committee released Jan. 3.
Still, there’s potential for “increased industry corrugated-products demand” from general population growth, Internet shopping and a resurgence in U.S. manufacturing, according to a presentation that Packaging Corp. executives made at a Nov. 28 conference hosted by Citigroup Inc.
Rock Tenn implemented a $50 per ton increase in domestic containerboard during the three months ended Sept. 30 and plans to follow with higher box rates, Chairman and Chief Executive Officer Jim Rubright said in a Nov. 1 statement. Packaging Corp. and KapStone Paper and Packaging Corp. also added $50 a ton to containerboard prices last year.
These companies appeal to investors because “it’s difficult to find a substitute,” so their ability to raise prices “very well could continue,” Gayle said.
As a “first-line monitoring element,” their results also help to shape sentiment about the recovery, he added. “In an economy that’s growing at a sub-par pace, you have to go granular to get the whole story.”
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