Behind every great food product is a well-engineered package.
Packaging is essential to keep food fresh, ensure it arrives at your local store in one piece, and to communicate the brand image that makes you want to buy the item.
It’s also a multi-billion dollar industry that’s expected to increase revenue 24% by 2014.
Benefiting from this growth is one of the world’s largest manufacturers of folding cartons. This company has a strong technical outlook, solid fundamentals and outstanding valuation… and its shares have 38% upside potential.
Graphic Packaging Holding Company (NYSE: GPK) — which operates facilities across the Americas, Europe, Asia Pacific and Brazil — offers paperboard and flexible packaging, primarily for the food and beverage industries.
In fact, it creates packaging for some of the world’s most recognized household brands, including Coco-Cola (NYSE: KO), Pepsi (NYSE: PEP), General Mills (NYSE: GIS) and Kraft (NYSE: KFT).
GPK expects its beer packaging to grow over 5% annually in the coming years.
The Chinese are also showing an increasing demand for dairy products, like milk and yogurt, which require innovative packaging solutions.
Graphic Packaging is working to increase production and reduce costs by switching from manual to automated packaging machines.
The company’s cost reduction strategies should help it save $60-$80 million per year, over the next several years.
Shareholders seem to be on board.
Despite a prolonged consolidation the stock remains above a three year old Major uptrend line. It has slowly risen from a low around $1.50, in late July 2009, to a March 2012 52-week high of $5.76.
The $5.76 level represents significant resistance. In 2011 and so far in 2012, the stock has approached this level five times, but has not yet been able break past this price point. However, in general, the more times resistance is tested, the more likely it is to be broken.
Important support, dating back to late 2010, is around the $4.50 mark. The Major uptrend line currently intersects around this level. So long as $4.50 support is maintained, the stock is likely to stay strong.
The shares are currently in a rectangular consolidation pattern — trading between $4.50 support and $5.67 resistance. Within this formation a large potential inverse head and shoulders pattern can be traced.
The inverse head and shoulders pattern is created by the left shoulder, marked by the April 2011 high of $5.87. The head is marked by the fall 2011 low, when the stock fell below $4.50 support and briefly dipped to a low of $3.05. After hitting this low, the stock bounced back up, hitting its most recent 52-week high of $5.76.
The inverse head and shoulders pattern would be resolved when the neck line, representing resistance — in this case at around $5.67 — is broken. According to the measuring principle for an inverse head and shoulders, calculated by adding the height of the pattern to the breakout level, shares could hit a price target of $6.84 ($5.67-$3.05=$2.52; $2.52+$5.67=$8.19). At current levels, this represents about a 53% potential gain.
This bullish technical outlook is driven by strong fundamentals.
In late April, Graphic Packaging reported first-quarter results. Due to an increase in sales volumes, revenue increased 7% to $1.1 billion, from $1 billion in the comparable year-ago quarter.
The company will report second-quarter results on Thursday, July 26th. Analysts expect revenue to rise 4.4% to $1.1 billion, from $1 billion in the year-earlier period.
Analysts’ project revenue will grow 5.2% to $4.4 billion in the full 2012 year, from $4.2 billion last year. By 2013, analysts’ expect revenue will notch up 1.8% to $4.5 billion.
The earnings outlook is solid, particularly for 2013.
Due to an income tax rate issue related to restructuring debt, earnings per share slipped 50% to $0.04 from $0.08 in the comparable year-earlier quarter. However, management notes that if a change to taxes owed was made, year-over-year earnings would have actually increased.
For the upcoming second quarter, analysts’ project earnings will stay flat at $0.09 per share, as the tax issue is expected to impact all quarters in 2012.
For the full 2012 year, analysts expect earnings will rise by a cent to $0.33, from $0.32 last year. By 2013, increased demand for packaging solutions, especially in China, should push earnings up 27% to $0.42 per share.
In addition to expected revenue and earnings growth, the company is also attractively valued.
Graphic Packaging has a trailing Price to Earnings (P/E) ratio around 7.9 — far lower than the industry average of 22. The company’s PEG ratio (P/E divided by growth rate) is exceptional at about 0.28. In general, a PEG under 1 shows good value. Additionally, the company has a Price to Book (P/B) value of about 1.8, whereas the packaging industry average is near 2.2.
Based on attractive valuation, a strong fundamental outlook, and bullish technicals, I plan to go long on the packaging solutions provider.
Risks to consider: Graphic Packaging does have debt issues. As noted, first-quarter earnings were affected by income tax issues related to modifying debt. The company currently has about $2.2 billion in debt. Available cash is only around $30.2 million. In difficult times, this high debt load could come back and hurt the company. However, Graphic Packaging has a strong, international customer base and has managed to grow even during the recent economic downturn.
Given this analysis, I will enter the trade with caution:
Action to Take: Based on the analysis above, here’s how I plan to trade GPK:
- Place a buy-on-stop order at $5.91, good until Friday, August 17th
- Set a stop-loss at $4.67
- Set a target of $8.19
- Risk/reward ratio is 1.8:1
Potential Profit = +38.6%
– Dr. Melvin Pasternak
The 10 Best Stocks to Hold Forever [sponsor]
They’re called “Forever” stocks — and not only have some of the world’s richest, most successful investors, politicians and businessmen been quietly cashing in on them for decades — but they’re piling billions of dollars into them today as well. Click here to see how you too can start profiting from these “Forever” stocks…
Source: Trade of the Week