Packaging & Forest Products

The Packaging and Forest Products stocks seem positioned for continued low interest rates and slow global economic growth. As such, Vertical Research sees a positive set up in names that would benefit from any shift towards either higher interest rates or an acceleration in global growth. If and as such a shift occurs, we believe two themes will emerge: (1) the secular structural improvements in U.S. containerboard and global fluff pulp, and (2) improved wood products markets (unless interest rates jump too far too fast). The virgin fiber-based United States containerboard/box system should benefit from its near-complete vertical integration coupled with a looming tightness in recyclable materials required by overseas producers. We also see the global market for fluff, or absorbent, pulps benefiting from recent consolidation moves. We also see the containerboard and paper/pulp names as “relative winner” in an environment of higher longer-term interest rates induced by continued-healthy economic growth. On the other hand, we see the rigid/flexible packaging companies as well as the timber REITs as being more defensive should the economy weaken further or slip into a recession.

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