WestRock Company: Gauge Analysis (updated November 23, 2020)

I have analyzed WestRock's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation of the Overall Score has been designed to favor companies that exhibit good value characteristics over fast growing firms that are expensive.  An Overall Score above 60 isn't easy to achieve, and it signifies that the company has enough value-investment appeal to be worth examining in more detail. 

First, a quick review of the company itself.

WestRock is a leading, multinational manufacturer of corrugated packaging, packaging for consumer goods, and other paper products.  WestRock was formed in 2015 when RockTenn and MeadWestvaco merged.  The combined company spun off its specialty chemicals operations and Home, Health and Beauty (HH&B) business in order to acquire several other firms in the  paper and packaging business.  The largest acquisitions were KapStone Paper & Packaging for $4.9 billion (2018) and Multi Packaging Solutions for $1.35 billion (2017).  In May 2020, in response to COVID-19, WestRock announced steps to reduce its expenses and to conserve cash.  Cutting the common stock dividend was one such step. Later in 2020, WestRock recorded a $1.3 billion non-cash charge to lower the carrying value of Consumer Packaging assets.

WestRock incurred a loss of $691 million on revenue of $18 billion during the last year. In the quarter that ended on 30 September 2020, WestRock earned $0.74 per share (excluding certain items), which beat the $0.68 Wall Street consensus forecast. See https://tinyurl.com/y237sr6f for WestRock's most recent quarterly report.

Shares of WestRock now trade for about $42 each.  These shares can be found in the Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.

Analysis Results:

WestRock's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $11.0 billion (large cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.7 (>2.0 is conservative)

    Long-term debt/Working Capital = 457% (<150% is conservative)

3. The Company Generates Stable Earnings: RED

    Seventeen positive quarterly earnings reports in last 5 years (worrisome)

    Earnings variability = 93% (very high)

4. The Company Exhibits Earnings Growth: YELLOW

    Owner Earnings growth rate (trailing year) = 37% (very good)

    Owner Earnings growth rate (five-year average) = 8% (modest)

    Free Cash Flow growth rate (trailing year) = 16% (good)

    Free Cash Flow growth rate (five-year average) = 2% (weak)

5. The Company is Efficiently Profitable: YELLOW

    Cash Flow Return On Invested Capital = 10% (so-so)

    Operating Profit/Sales = 8.9% (okay)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = -1% (not good)

    Dividend = 32% of last year's FCF (easily sustainable with room to grow)

7. The Company's Shares are Fairly Valued: YELLOW

    Price/Owner Earnings (last year) = 8.7 (appealing)

    Price/GAAP Earnings (five-year average) = 22.7 (moderate to pricey)

    Free Cash Flow/Market Value = 10.0% (very appealing), more than the five-year average of 8.1%)

    Acquirer's Multiple = 12.8 (reasonable)

    Price/Book Value = 1.0 (about the same as its five-year average)

    Price/Sales = 0.6 (about the same as its five-year average)

In summary, the analysis assigned WestRock Company two GREEN, three YELLOW, and two RED grades.  The resulting Overall Score is 48 of the 100 possible points, which is unappealing.  The score is below the 60-point threshold, and, therefore, WestRock does not qualify at this time for more in-in-depth consideration.

Check back here occasionally for updates to the Overall Score, which can change when the company releases new financial results and when there's a significant change in the company's share price.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to perform verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

---------------

 #westrock    #wrk    #gauges  #gcfr  #gcfr2 #valueinvesting   #financialanalysis