WestRock (WRK) Tops Q1 Earnings, To Buy KapStone For $4.9B

WestRock Company (NYSE:WRK) reported first-quarter fiscal 2018 (ended Dec 31, 2017) adjusted earnings of 87 cents per share, beating the Zacks Consensus Estimate of 75 cents by a margin of 16%. Earnings also surged 85% from the prior year quarter.

Including one-time items, the company posted earnings of $4.38 per share in the reported quarter compared to 32 cents per share recorded in the prior-year quarter.

Operational Update

WestRock’s total revenues rose 13% year over year to $3.9 billion. However, revenues missed the Zacks Consensus Estimate of $4 billion. The year-over-year improvement in sales was primarily driven by increased sales in the Corrugated Packaging and Consumer Packaging segments. This helped mitigate absence of net sales from WestRock’s former Home Health & Beauty (HH&B) business in the current-year quarter due to the sale of the same in April 2017.

Cost of sales went up 20.7% year over year to $3.1 billion in the fiscal first quarter. Gross profit improved 32% to $782 million. Gross margin expanded 520 basis points to 20% in the quarter. Adjusted segment EBITDA was $654.3 million compared with $490.2 million reported in the prior-year quarter.

Segment Performance

Corrugated Packaging: Sales at the segment improved 12.1% year over year to $2.2 billion in the quarter. Adjusted segment EBITDA increased 49% year over year to $427.8 million.

Consumer Packaging: Sales at the segment went up 16.7% to $1.8 billion from the year-ago quarter. Adjusted segment EBITDA went up 9% year over year to $234.4 million.

Land and Development: The segment’s sales came in at $11.4 million, a 79% plunge from $54 million in the prior-year quarter. Adjusted segment EBITDA for the segment was a loss of $0.6 million compared with a gain of $1.9 million recorded in the prior-year quarter.

Financial Position

As of Dec 31, 2017, cash and cash equivalents were $306 million, up from $298 million as of Sep 30, 2017. As of Dec 31, 2017, total debt was $6,610.4 million, up from $6,544.8 million as of Sep 30, 2017. Cash flow from operations came in at $363.5 million in the reported quarter compared with $517.4 million recorded in the year-ago quarter.

WestRock has signed a definitive agreement to acquire all of the outstanding shares of rival KapStone Paper and Packaging Corp. (NYSE:KS) for $35.00 per share and will assume approximately $1.36 billion in net debt, for a total enterprise value of approximately $4.9 billion. Upon closing, the acquisition is expected to be immediately accretive to the company’s adjusted earnings and cash flow. The acquisition will help WestRock expand its presence in the western United States and broadens WestRock’s differentiated paper and packaging solutions portfolio with the addition of attractive paper grades and distribution capabilities.

Outlook

WestRock stated that it has achieved $60 million in year-over-year productivity improvements in the fiscal first quarter, and a run rate of $910 million of synergy and performance improvements since its creation.

WestRock has outperformed the industry with respect to price performance over the past year. The stock has gained 23.4%, while the industry has recorded growth of 30.7% during the same time frame.

Zacks Rank & Stocks to Consider

WestRock currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the same industry are Domtar Corp. (TO:UFS) and P. H. Glatfelter Co. (NYSE:GLT) . Both stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Domtar has a long-term earnings growth rate of 5%. Its shares have rallied 46.6% in the past six months.

P. H. Glatfelter has a long-term earnings growth rate of 18.6%. The company’s shares have appreciated 82.5% during the same time frame.

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