Paper Money
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Before the FDA, before the proliferation of local health inspectors and the USDA, grocery shopping at the general store was a dirty business…literally dirty. Your counterman would cut the meat then without wiping his hands grab you some pickles from the communal pickle barrel. Flies and other vermin feasted on unprotected staples like flour, sugar, and molasses. As for the rest of the food everybody had their hand in, again literally.
The Quiet Revolution
Then came a revolution, a very quiet revolution caused by paper, cardboard, plastic, and tin. In the book ‘Eating in America’, a gastronomic history, Waverly Root and Richard de Rochemont wrote of this revolution, “Packaging is an almost mystical concept which for the unimaginative may mean nothing more than enveloping food in some sort of covering; but for the philosophically inclined, what is essential about packaging is that it brings shape out of formlessness.” And hygiene out of pestilence, I might add.
These words should be on the front of every food packaging company’s annual report, maybe even carved on the portals of their corporate headquarters. The essential American desire for sanitary food and personal property as theorized by Rich Cohen in his book about Sweet and Low, the sweetener company, “Sweet and Low: A Family History” was crucial to the success of his family’s company. In his view it wasn’t merely the desire to stay slim but the actual individually wrapped packets that appealed so strongly to Americans, hygienic yet personal.
If you have travelled widely you may have seen grocers in other countries still operating the old-fashioned way and were appalled. It’s just the multi-decade trends of germophobia and the all-American desire to ’have one of my own’ operating in your head.
This should sound sweetest to the ears of publicly traded packaging companies like International Paper Company (NYSE: IP) and Packaging Corp. of America (NYSE: PKG) and the manufacturers of candy, snacks and just about every packaged food in the grocery store and indirectly to oil companies (think plastics). Maybe you were taught that sharing is caring in kindergarten but Americans don’t really want to and the smartest companies know this. When was the last time anyone handed out apples or homemade popcorn balls at Halloween? Who in their right mind would allow their children to eat them?
At least three companies are profiting in a very quiet way from these trends, the aforementioned International Paper and packaging Corp. of America as well as The Hershey Company (NYSE: HSY). Any company that can more successfully make clean and sanitary individual portions of food products is also sailing high.
A higher yielding name like International Paper with its 3.00% dividend and low P/E of 13.92 is worth a look-see. While the Consumer Packaging division is only part of four at International Paper including Industrial Packaging, Printing Papers and Distribution it is the segment impacted by these two trends. International Paper was founded in 1898 and has grown since the beginning of the twentieth century along with the adoption of more sanitary food, cosmetics and pharmaceuticals.
This big cap name has suffered along with the industrial economy. Despite that, it is up 28.73% over 52 weeks better than the S&P 500 at 16.56%. It has been expanding internationally, especially in Russia, and just acquired Temple-Inland last fall for $4.3 billion including taking on $600 million in debt. The purchase increases International Paper’s corrugated products market by 10% and will be accretive by Fall 2013. The company’s CEO John Faraci was already cited as one of the top ten large cap CEOs by Chiefist.com which rates CEOs based on criteria such as return on equity, EPS growth and margin expansion. Other good news is that paper and cardboard prices are rising and the dividend may rise by 50% within several years.
Competitor Packaging Corp. of America is in the containerboard and corrugated products business and also manufactures wax-coated products for the meat and agricultural industries. PKG pays a 3.10% dividend and has a 21.86 P/E but has a market cap just about one fifth of International Paper’s 15.07 billion. Both companies have roughly the same amount of insider ownership at less than 1% and similar institutional ownership at 88% and 85% respectively. Of the two I prefer International Paper with its outsized paper products market share (almost 33%) and CEO Faraci.
Then there’s Hershey’s, not a packaging company, rather North America’s largest confectioner. In keeping with the trends I’ve outlined it is has initiated what they call a ‘hand to mouth’ strategy packaging some of their most popular brands in individual size portions just in time for Halloween and the holidays. No more hands contaminating the candy dish!
Hershey’s is pennies away from its 52 week high of $73.16 and has a 2.10 % yield and a 24.77 P/E. You may feel you’ve missed the sweet powerhouse move but as I wrote in an earlier post it has pricing power, strong brand name recognition and Wall Street has been eating it up. For much more on Hershey’s and its new packaging strategy click here.
Let's Wrap It Up
Both these trends can wrap you up some profits. Even though these names have run during the last year these are not just multi decade trends but are probably multi-century trends. As standards of hygiene improve throughout the world the adoption of sanitary packaging will increase exponentially. As incomes increase sharing will mean not sharing germs but offering an individually wrapped portion to a friend. Your kindergarten teacher and your doctor would be proud.
