Profiting with the Environment

The pursuit of long-term profits is a cardinal motivator for investors. However, in today’s sustainability-conscious landscape, a company’s environmental track record has a significant impact on its financial performance. It has become increasingly evident that companies not adhering to environmentally friendly practices can find themselves isolated, facing financial repercussions as they are shunned by banks, investors, and even customers.

Banks, recognizing the increased risk of financing businesses that are not environmentally sound, are shifting their strategies toward supporting green investments. Many have established stringent environmental, social, and governance (ESG) criteria which corporations must meet to access funding. Companies with poor environmental records struggle to secure financial backing, curtailing their growth potential and profitability.

On the other hand, companies developing products that are beneficial to the environment are increasingly profitable, reaping financial rewards while contributing positively to the planet. Their appeal extends beyond environmentally conscious investors, as they attract a wider customer base and enjoy regulatory support, enhancing their profitability in the long run.

While long-term profitability remains the driving force behind Smart Investor’s stock recommendations, we must also take into consideration environmental aspects while choosing the investment criteria, as they may strongly influence the companies’ financial and stock performance.


Economy and Markets: Looking Forward

There are several very important reports scheduled to be published in the next few days:

  • Later today, we’ll receive the Federal Reserve’s decision on interest rates; the Fed is broadly expected to lift rates by 0.25% to their highest since 2002.
  • On Thursday, we’ll see published a preliminary estimate of the Q2 2023 GDP Growth Annualized.
  • On Friday, we’ll see the data on June’s Core Personal Consumption Expenditures (Core PCE), the Federal Reserve’s preferred gauge of inflation.

As for the stock calendar, the Q2 2023 earnings season for Smart Investor Portfolio companies is powering ahead with earnings reports coming in in the next days from General Dynamics (GD), Euronet Worldwide (EEFT), Molina Healthcare (MOH), Check Point (CHKP), Teck Resources (TECK), InMode (INMD), Arista Networks (ANET), and Enterprise Products Partners (EPD).

The ex-dividend date for Enterprise Products Partners (EPD) is on July 28.



Today, we’re letting go of stock from a coal company with very solid fundamentals, whose prospects for further growth have soured due to financing problems on the back of its polluting practices. In its place, we’re adding a well-managed industry leader, which has proven its ability to maintain outstanding performance in all economic conditions – and also help the environment.


New Deletion: Whitehaven Coal Limited (WHITF)

Whitehaven Coal Limited develops and operates coal mines in New South Wales and Queensland, Australia. The company produces metallurgical and thermal coal. It operates four mines, including three open-cut and one underground, located in the Gunnedah Coal Basin in New South Wales. The company sells coal in Japan, Korea, Taiwan, India, Malaysia, New Caledonia, Vietnam, Thailand, Indonesia, and Europe. Whitehaven Coal Limited was founded in 1999 and is based in Sydney, Australia. Whitehaven is a mid-cap company belonging to the Energy sector (Industry: Thermal Coal).

WHITF is a financially sound and profitable company with almost nonexistent debt and industry-beating capital efficiency ratios. Last year, as energy prices surged, the company saw its earnings jump by thousands of percent. As no one can expect this level of profitability to continue for any meaningful period, the decline in revenue and earnings growth rates are to be expected; this alone wouldn’t prompt us to sell the stock.

However, there’s a significant red flag that has drawn our attention to the company’s future well-being. At the beginning of July, Whitehaven revealed that it had encountered funding problems as Australian banks refused to refinance the company’s $1 billion debt facility. The refusal comes on the back of the return of climate consciousness, which is reentering the frontlines as energy prices recede. Now that the energy crisis is behind us, banks are returning to their plans to decarbonize their loan portfolios. Since coal is one of the most environmentally damaging industries, coal producers are the first to encounter trouble.

Whitehaven’s $1.8 billion cash “war chest” means that it is in no immediate danger and has no lack of liquidity for its operations. However, it will put pressure on Whitehaven’s ability to expand its coal mines. The company plans to expand a number of its existing mines and build new ones; it also plans to acquire two plants from BHP in Queensland. Without the revolving facility, the company will have to finance its operations with cash that could otherwise be handed back to shareholders.

In addition to the financing troubles, environmental concerns have led Australia’s authorities to introduce new measures aimed at reducing greenhouse gas emissions. Whitehaven’s flagship mines are among the top emitters of greenhouse gas in Australia; under the new carbon policy introduced on July 1st, they will have to adhere to much stricter emission reduction rules. Basically, these new rules mean that Whitehaven will be compelled to purchase many more carbon offsets, increasing total compliance costs by a wide margin.

Coal producers’ stocks have been pressured lately as the prices of thermal coal have tumbled to their two-year low, driven down by concerns of oversupply along with weaker demand from China. The longer-term outlook for coal prices is weak, weighing on producers. Whitehaven’s financing problems and forecasted higher costs of “carbon tax” add to these considerations.

The company’s stock fell 19.6% year-to-date, strongly underperforming its sector as represented by iShares MSCI Global Energy Producers ETF (FILL). Luckily, we purchased WHITF almost at its latest trough, thus we are closing this position with a gain of 4.3% since purchase.

Whitehaven’s removal from the portfolio will make room for the company we are adding this week, GPK.


New Addition: Graphic Packaging (GPK)

Graphic Packaging International provides packaging solutions for food, beverage, food service, household, healthcare, and other consumer products. GPK also produces folding cartons, kraft paperboard, coated-recycled boxboard, and multi-wall bags. It also offers various laminated, coated, and printed packaging structures, as well as barrier packaging products that protect against moisture, hot and cold temperatures, grease, oil, oxygen, sunlight, insects, and other potential product-damaging factors. GPK also designs and manufactures specialized packaging machines that package bottles and cans, and non-beverage consumer products; installs its packaging machines at customer plants and provides support, service, and performance monitoring of the machines.

Graphic Packaging is a Fortune 500 corporation, one of the largest producers of folding cartons and fiber-based food service products in the United States and Europe, holding leading market positions in coated recycled paperboard, coated unbleached kraft paperboard, and solid bleached sulfate paperboard. GPK is headquartered in Atlanta, Georgia; it has division headquarters in the U.S., Tokyo, and Brussels and over 130 facilities worldwide. With a market capitalization of $7.3 billion, it is a mid-cap company belonging to the Materials sector (Industry: Packaging & Containers).

Graphic Packaging is the largest producer of coated recycled board (CRB) in North America. CRB is one of the most sustainable packaging materials in the world, as it is made entirely from recycled fiber. In recent years, consumers and producers alike have displayed increasingly higher interest in more sustainable packaging, and GPK is well-positioned to meet the surging demand. Around 95% of GPK’s revenues stem from recyclable products; the company’s primary raw materials are all recyclable. As the public and the governments push for environmental sustainability, GPK’s reputation as a leader in sustainability supports its long-term growth potential.

Despite belonging to a traditional “old economy” industry, GPC is a long-time innovator, holding over 2,700 active patents. The company caters to the $12.5 billion addressable market of recyclable packaging for plastic substitution, as well as to numerous smaller niches, such as the proprietary drinking cup market for food service, European fiber-based packaging initiatives, and more. To take full advantage of the existing and emerging opportunities, Graphic Packaging has been growing organically as well as through acquisitions. Thus, for organic growth, the company is building a new CRB mill in Texas, expected to add $160 to annual earnings before tax when it starts operating in 2026. As for inorganic expansion, GPK has made 17 mergers and acquisitions in the past decade, including four in the past five years. The latest large acquisition was AR Packaging Group AB, Europe’s second-largest producer of fiber-based consumer packaging, in 2021.

The company’s history began in a single paper mill over 100 years ago; since that time, it underwent many business changes as well as mergers & acquisitions and name changes. It has existed in its current form since 1992 and has been publicly traded on the NYSE since that year.

The company operates in 18 countries worldwide. However, the U.S. is its primary market, accounting for 76% of total sales, which leaves GPK with ample room for international growth. Food packaging is responsible for 34% of sales, beverage – 22%, food service – 20%, consumer products – 20%, and the rest comes from healthcare packaging. GPC’s customers are consumer-facing companies that use its packaging. The company’s customer list includes such well-known names as Kellogg (K), Coca-Cola (KO), McDonald’s (MCD), 3M (MMM), and Johnson & Johnson (JNJ).

The company has a highly diversified customer portfolio: no single customer makes up more than 5% of revenue. Most of GPK’s customers are large, established firms that are expected to continue growing their sales. In addition, the company has a steady and sticky stream of revenue, since the lion’s share of its packages are wrapped around daily consumption products like food and beverages, whose sales steadily increase in the long term. As a result, even if GPK’s customers’ sales growth doesn’t increase above population growth, it will still provide Graphic Packaging with a steadily rising revenue stream.

Graphic Packaging is a financially healthy company. Even though it has amassed $5.3 billion in debt, mainly due to the acquisition of AR Packaging, it has been working to reduce the debt load, cutting it by over $500 million in the past year alone. GPK’s debt is well-covered by operating cash flow, while EBIT comfortably covers its interest payments. The company’s capital efficiency and profitability metrics are outstanding. Although the company’s superb Return on Equity (ROE) of 30% is skewed by its debt ratios, its high Return on Assets (ROA) of 5.8% underlines its efficiency in generating profits. GPK boasts a net profit margin of 6.7% and an operating margin of 10.6%, above the industry averages of 6.0% and 9.4%, respectively.

In Q1 2023, Graphic Packaging exceeded analysts’ estimates on revenues and earnings. It delivered a strong EPS beat, as it did in six consecutive quarters before that. In the past five quarters, the company’s EPS posted low triple- or high double-digit growth. In the first quarter, EBITDA surged by 40% year-on-year, and net income jumped by 93%. As a result of a banner quarter, the company’s management upped its full-year 2023 guidance, raising forecasted EBITDA by 6% and annual EPS – by 8%.

Graphic Packaging is a dividend-paying company. Although its dividend yield of 1.6% is mediocre by its sector’s standards, it still presents a valuable income addition. Moreover, the company has been increasing its dividend payouts for the past eight years and is expected to continue raising its dividends. In addition, GPK returns capital to its shareholders through share buyback programs. Thus, in Q1 2023, the company repurchased its shares for the amount of $28 million.

The company’s stock has outperformed its sector, as represented by the Materials Select Sector SPDR Fund (XLB), in the long and short term. In the past three years, GPK rose 66%, while XLB rose 34%. Year-to-date, the company’s stock has appreciated by 10%, while XLB rose by 8.3%. This year’s performance was dented by a recent 11% decline in GPK, which was the result of profit-taking after the stock reached its all-time high in June. That decline supports our case as it has led to some reduction in the company’s valuation. Now, Graphic Packaging is trading at a TTM P/E of 11.9 and a Forward P/E of 8.7, representing a material discount to its sector and industry averages. GPK is now trading significantly below its fair value.

Analysts see an average 12-month upside of 32.5% for the stock. Hedge funds are very positive toward the company and have been increasing their holdings in recent months. Graphic Packaging carries a “Perfect 10” Smart Score rating on TipRanks with a “Strong Buy” recommendation:

In conclusion, we believe that Graphic Packaging, a leading packaging company with a stable and sticky business model, will continue to perform well in the short as well as long term, supported by its business effectiveness, prudent management, and secular tailwinds of sustainability demand. Therefore, we view GPK as a valuable addition to the Smart Investor portfolio.


Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

Our prestigious club’s ranks have remained unchanged this week, still containing six stocks: GE, TECK, ORCL, AVGO, WCC, and ALV.

The closest runner-up is now EEFT with a gain of 25.2% since we included it in the Portfolio. Will it join the ranks next week, or will someone else outpace it to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, August 2, before the market opens.

Until then – we wish you a world of investment success!

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