Graphic Packaging Holding Company (NYSE:GPK) shares are down more than -2.91% this year and recently increased 1.83% or $0.27 to settle at $15.00. International Paper Company (NYSE:IP), on the other hand, is down -0.10% year to date as of 02/12/2018. It currently trades at $57.88 and has returned -2.62% during the past week.
Graphic Packaging Holding Company (NYSE:GPK) and International Paper Company (NYSE:IP) are the two most active stocks in the Packaging & Containers industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect GPK to grow earnings at a 21.54% annual rate over the next 5 years. Comparatively, IP is expected to grow at a 11.70% annual rate. All else equal, GPK’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 11.69% for International Paper Company (IP). GPK’s ROI is 10.90% while IP has a ROI of 7.90%. The interpretation is that GPK’s business generates a higher return on investment than IP’s.
The value of a stock is simply the present value of its future free cash flows. GPK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.40. Comparatively, IP’s free cash flow per share was +1.28. On a percent-of-sales basis, GPK’s free cash flow was 2.88% while IP converted 2.43% of its revenues into cash flow. This means that, for a given level of sales, GPK is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. GPK has a current ratio of 1.40 compared to 1.50 for IP. This means that IP can more easily cover its most immediate liabilities over the next twelve months. GPK’s debt-to-equity ratio is 1.76 versus a D/E of 2.51 for IP. IP is therefore the more solvent of the two companies, and has lower financial risk.
GPK trades at a forward P/E of 14.87, a P/B of 3.61, and a P/S of 1.06, compared to a forward P/E of 11.03, a P/B of 4.92, and a P/S of 1.08 for IP. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. GPK is currently priced at a -16.39% to its one-year price target of 17.94. Comparatively, IP is -15.06% relative to its price target of 68.14. This suggests that GPK is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.90 for GPK and 2.10 for IP, which implies that analysts are more bullish on the outlook for IP.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. GPK has a beta of 1.21 and IP’s beta is 1.44. GPK’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. GPK has a short ratio of 1.66 compared to a short interest of 3.30 for IP. This implies that the market is currently less bearish on the outlook for GPK.
Graphic Packaging Holding Company (NYSE:GPK) beats International Paper Company (NYSE:IP) on a total of 11 of the 14 factors compared between the two stocks. GPK is growing fastly, is more profitable, generates a higher return on investment, has a higher cash conversion rate and has lower financial risk. In terms of valuation, GPK is the cheaper of the two stocks on book value and sales basis, GPK is more undervalued relative to its price target. Finally, GPK has better sentiment signals based on short interest.