The rise of e-commerce is a megatrend that’s not going anywhere, but outside of the obvious sales powerhouses like Amazon.com, Alibaba, or eBay, where should investors be looking if they want to capitalize on it?
In this segment of the MarketFoolery podcast — an all-mailbag episode — host Chris Hill and Motley Fool senior analyst Bill Barker field a question from a listener particularly interested in WestRock (NYSE: WRK) — a relatively obscure company that operates in the background of e-commerce. It’s the second-biggest packaging company in the U.S., but is it a buy?
A full transcript follows the video.
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This video was recorded on July 2, 2018.
Chris Hill: Question submitted through the Facebook group from David Stansfield in Colorado — “Do you have any thoughts on WestRock? I own it for the long term.” WestRock, a company we don’t talk about all that often. I think when Mike Olsen was on the podcast last year, we ended up talking about WestRock.
WestRock is one of the largest paper and packaging companies in the world. This company has popped up in the past when people have looked at the rise of e-commerce, not just Amazon but all kinds of e-commerce. If more and more things are going to be shipped, then, in theory, you’re going to need more and more paper products to ship them in. So, a few times in the past, people have asked, “Wait a minute, who’s making all these cardboard boxes?” WestRock is one of those companies. Any thoughts on WestRock?
Bill Barker: At the moment, I’m a fan of WestRock, but maybe not for the reasons why the question came in. They have agreed to buy KapStone Paper and Packaging, which is a longtime holding of our small and mid-cap fund. KapStone is up 52% for the year, very much unlike WestRock, which is not up. They paid a premium to agree to acquire KapStone. The deal hasn’t finalized yet, so there’s still some chance that it might not get approved by the regulators for some reason, but it looks like it’ll go through. The market is pricing that in.
Meanwhile, WestRock has grown a tremendous amount as a company. It’s been a serial acquirer. And yet, the stock has not performed nearly as well. That’s a function of investing in highly cyclical products or sectors. Paper is not a growth industry, it’s very much a cyclical industry, where all the participants are basically at the mercy of the market pricing for paper and corrugated paper, craft paper, it does a lot of different kinds of container board and paper and packaging. But, the market sets the price for that.
It’s a commodity producer. There’s good and bad management within commodity-producing sectors, but at the end of the day, you’re largely just taking what the market gives you. You don’t really get the same sort of compounding effects of growth, but if you’re good, for some reason, at timing the cycles, you can make a lot of money on the cycle. If you bought this at the beginning of 2016, you’ve doubled your money. But if you bought it when it first came public, or if you bought it in 2015, it’s flat.
Hill: Any time I hear the phrase “serial acquirer,” any company that is looking to buy as many competitors as possible, and that’s how they’re going to achieve growth, the first question that pops into my mind is, how are they doing at the integration? Any time we’ve seen trouble for companies in that mode of growth, that’s usually, if it’s not the No. 1 reason they’re not getting it done, it’s certainly in the top three. They’re going out and buying, and they’re not really thinking through, “How are we going to wring out the synergies with this company we just bought? How are we going to integrate them and the people from that company into our corporate culture, to the extent that we have one?”
Barker: I can’t give you a good answer on that, except that it’s a good question to ask when looking at whether you should be an investor in a serial acquirer. There are economies of scale. This is a company that, in 2007, let’s say — go back a little bit before the recession so we’re not anchoring on those numbers — doing about $2 billion a year in sales. $15 billion now. So, tremendous growth at the top line. But the bottom line, it’s obviously, where did they get the money to acquire all that stuff? It’s issued a lot of shares over that time.
I think the story is a good one here, and they have allocated capital well. But, despite the fact that they are 7X the size in terms of sales, they’ve diluted a fair amount. They have about 4X as many shares out. It’s more like, the earnings per share have a little bit better than doubled in the last ten years.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bill Barker has no position in any of the stocks mentioned. Chris Hill owns shares of Amazon and eBay. The Motley Fool owns shares of and recommends Amazon and Facebook. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.