Graphic Packaging: Expect Outperformance To Continue (NYSE:GPK)

Although the ideal scenario when making a purchase of stock is to see the value of that stock appreciate, sometimes, in a volatile market, even achieving a decline that is lower than the decline achieved by the broader market can be considered a win. A great example of this playing out can be seen by looking at Graphic Packaging Holding Company (NYSE:GPK), a leading provider of sustainable, fiber-based packaging solutions for food, beverage, and consumer products. Driven by robust top line and bottom-line performance lately, shares of the company have declined at a rate that is far less than with the broader market has achieved. Although the company might be more or less fairly valued compared to similar firms, the stock is cheap enough to warrant a ‘buy’ rating in my opinion.

This played out nicely

Back in early May of this year, I wrote an article that took a rather bullish stance on Graphic Packaging Holding Company. I was particularly impressed by the company’s solid operating history, with both organic growth and acquisitions pushing results higher year after year. With data available for just the first quarter, the 2022 fiscal year was shaping up to be quite positive for investors. Add on top of that the fact that shares of the firm were attractively priced, and I could not help but to rate the enterprise a ‘buy’ prospect at that time. When I provide this kind of rating to an enterprise, my assessment is that shares should generate returns that exceed what the broader market can achieve over an identical period of time. So far, that call has proven to be pretty solid. While the S&P 500 is down by 15.9%, shares of Graphic Packaging Holding Company have dropped a more modest 7.8%.

This return disparity is no fluke. To see why results have been this way, we need only look at how the company has performed lately. In the second quarter of its 2022 fiscal year, which is the only quarter for which new data is available that was not available when I last wrote about the firm, sales came in at $2.36 billion. That’s 35.8% higher than the $1.74 billion generated the same quarter one year earlier. Of the $621 million increase, $278 million was attributed to higher pricing as management pushed increased costs onto its customers. But the big driver was volume and product mix, contributing $379 million to the company’s top line growth. This was offset some, unfortunately, by a $36 million impact associated with foreign currency fluctuations.

With revenue rising, profitability followed suit. Net income jumped from $38 million in the second quarter of 2021 to $66 million the same time this year. Even though interest expense surged from $29 million to $48 million, the company benefited from an improvement in its gross margin from 14.7% to 18.7%. This was also instrumental in pushing up other profitability metrics. For instance, operating cash flow rose from $252 million to $270 million. If we adjust for changes in working capital, it would have risen from $210 million to $339 million. Over that same window of time, we also saw EBITDA improve, climbing from $248 million to $396 million.

This strong performance was not a one-time thing. Results for the first half of 2022 as a whole have also been encouraging. For instance, revenue of $4.60 billion in the first half of the 2022 fiscal year came in 35.9% higher than the $3.39 billion generated the same time one year earlier. This increase, combined with better cost management, helped push net income from $92 million to $173 million. Operating cash flow did worsen, declining from $305 million to $288 million. But if we adjust for changes in working capital, it would have risen nicely from $408 million to $597 million. A similar trend can be seen when looking at EBITDA, with the metric surging from $488 million to $746 million.

Unfortunately, we don’t really know what to anticipate for the 2022 fiscal year as a whole. Management has not offered any detailed guidance. But if we were to annualize results experienced so far, we would get net income of $383.6 million, adjusted operating cash flow of $1.23 billion, and EBITDA of $1.59 billion. Given these figures, we can calculate that the company is trading at a forward price to earnings multiple of 16.2, a forward price to adjusted operating cash flow multiple of 5.1, and a forward EV to EBITDA multiple of 7.5. To put this in perspective, using data from the 2021 fiscal year instead would give us readings of 30.5, 7.4, and 11.5, respectively.

To complete my analysis, I also decided to compare Graphic Packaging Holding Company to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 10.6 to a high of 33.9. This range is using data from the 2021 fiscal year. Using our 2021 figures, we can see that four of the five prospects were cheaper than Graphic Packaging Holding Company. Using the price to operating cash flow approach, the range was between 6.6 and 19.4. In this case, only one of the five companies was cheaper than our target. And using the EV to EBITDA approach, the range was between 6.6 and 49.9, with three of the five companies being cheaper than our prospect.

Company	Price / Earnings	Price / Operating Cash Flow	EV / EBITDA
Graphic Packaging Holding Company	30.5	7.4	11.5
Sealed Air Corp. (SEE)	20.3	14.5	12.3
Sonoco Products (SON)	33.9	19.4	49.9
WestRock (WRK)	13.7	6.6	6.6
Packaging Corporation of America (PKG)	15.4	11.8	8.6
International Paper (IP)	10.6	9.1	10.1

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Takeaway

At this point in time, I definitely believe that Graphic Packaging Holding Company remains a solid prospect for investors to consider. Management has done well to continue growing revenue and profitability in this environment. Obviously, we could see some weakness moving forward. But given how affordable shares are, I do think that downside might be limited there. And in the long run, while shares aren’t the cheapest or the most attractive in the space, I do believe that they are cheap enough to offer upside potential.