Clearwater Paper Shows Margin Improvement And Growing Preference For Sustainable Packaging

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Written By Dean McHugh

Clearwater Paper Corporation (NYSE: CLW) is a prominent manufacturer in the paper and packaging industry, specializing in bleached paperboard and at-home tissue products. Despite volatile revenue growth, CLW has managed to consistently improve its profitability margins.

The company’s positioning for long-term growth is bolstered by the increasing preference for recycled-based packaging. The recent acquisition of the Augusta facility is anticipated to significantly enhance CLW’s scale and growth capacity, making it a strong investment candidate.

Historical Financial Analysis

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Clearwater Paper has shown fluctuating revenue growth, with FY23 experiencing stagnant year-over-year growth due to weaker demand for paperboard as clients adjusted inventory levels.

However, demand for private-label consumer products has remained strong. In FY22, CLW saw a 17.35% revenue growth driven by increased prices in response to inflation.

Profit margins have improved across the board, with FY23 showing the most significant gains. Adjusted EBITDA grew to $281 million, with margins expanding from 11% to 13% compared to the previous year.

This improvement was primarily due to the tissue segment, which doubled its adjusted EBITDA from $74.2 million to $150.05 million. However, the pulp and paperboard segment saw a slight decline from $220.4 million to $206.4 million.

The company anticipates that major maintenance at its Lewiston facility will impact adjusted EBITDA by $30-$35 million in FY24.

First Quarter 2024 Analysis

In Q1 2024, Clearwater Paper’s net sales fell by 6% year-over-year. The Pulp & Paperboard segment experienced a 12% decline due to lower volumes and average net selling prices, while the Consumer Products segment saw a 2% increase, driven by strong retail tissue volume despite slight weaknesses in average pricing.

Adjusted EBITDA for the Pulp & Paperboard segment fell from $66 million to $34 million due to lower sales prices and operational suspensions at Lewiston caused by severe weather. Conversely, the Consumer Products segment’s adjusted EBITDA margin increased from $19 million to $46 million, thanks to higher volume, lower input costs, and operational efficiencies.

Segment Revenue

Clearwater Paper’s revenue is roughly evenly split between its Pulp & Paperboard and Consumer Products segments. The company is a leading manufacturer of Solid Bleached Sulfate (SBS) paperboard, which is increasingly preferred for its environmentally friendly properties.

Additionally, CLW produces a complete line of private-branded tissue products, catering to major U.S. retail channels.

Growing Demand for Recycled-Based Packaging

There is strong demand for packaging in North America, particularly for SBS paperboard as an alternative to plastic. Environmental regulations and consumer preferences are driving this trend, with states banning plastic and cities successfully reducing plastic bag usage.

SBS is recyclable, biodegradable, and has a historical annual growth of 1-2%, which may increase further due to sustainability trends.

Potential Displacement of SBS by FBB

CLW may face competition from Folding Box Board (FBB) producers like Billerud AB, which is investing in FBB capacity in North America. This new competition could challenge SBS’s market share if FBB producers can offer competitive pricing.

Augusta Acquisition

The acquisition of Augusta, a paperboard manufacturing facility, adds approximately 600,000 tonnes of paperboard capacity to Clearwater Paper. This acquisition is expected to significantly enhance CLW’s scale and growth potential, projecting an additional $140-$150 million in EBITDA by 2026 and increasing CLW’s paperboard capacity by 70%.

Relative Valuation Model

Compared to its peers, CLW shows a strong growth outlook but slightly underperforms in profitability margins. The company’s P/E ratio is 14.42x, higher than the peers’ median of 11.99x, though lower than its five-year average.

Given its growth potential and competitive positioning, a target P/E applied to its 2025 EPS of $4.87 results in a target price of $58.39, reflecting a 12% upside potential.

Risks to Consider

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The introduction of FBB into North America could threaten CLW’s market share if FBB can offer lower costs. Billerud AB’s planned FBB production facilities may increase competition by 2030. However, this threat is not immediate. CLW should focus on strategic initiatives to counter this potential disruption.

Given its growth catalysts and 12% upside potential, CLW is a compelling investment opportunity.


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