WRK: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for WestRock's earnings for fiscal 2021's first quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about WestRock.

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.

Shares of WestRock now trade for about $45 each, giving the company a market value of $12 billion. These shares can be found in the Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.

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.

Revenue in the September 2020 quarter totaled $4.5 billion, 4 percent less than last year's $4.7 billion. The Corrugated Packaging business was responsible for 65 percent of overall revenue, and this unit's revenue percent fell by 4.0 percent compared to the year-earlier result. The Consumer Packaging business contributed 36 percent of revenue, and this unit's revenue decreased by 3.6 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

WestRock management described their expectations for the first quarter of fiscal 2021 in October 2020 after they last reported quarterly results.

The guidance indicates that WestRock expects Adjusted EPS (a non-GAAP figure) in the December 2020 quarter to be between $0.46 and $0.54.  The equivalent figure was $0.58 per share in the December 2019 quarter, so an earnings decline is the expectation.  Note also that GAAP EPS will be lower than Adjusted EPS, although the difference between these figures varies quite a bit from quarter to quarter.

The guidance does not include a quantitative estimate for revenues, but the comments don't suggest optimism.  My guess is a 3-percent decline from Revenues of $4.47 billion in September 2020 quarter.

The Gross Margin has been about 18.2 percent in recent periods, but I am going with 18.0 percent because the guidance hints at higher costs.  For a similar reasons, I'm assuming Sales, General, and Administrative (SG&A) expenses will edge up to about 10 percent of revenue.  For the other lines of the Income Statement, I followed the trends evident in WestRock's historic results.

With these assumptions, the GAAP EPS turns out to be $0.44 per share.  Non-GAAP EPS would be higher, presumably within the guidance range.  I have no reason to believe there will be a larger-than-usual charge that would impact GAAP but not non-GAAP results.

The following Income Statement results from estimates made as discussed above. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

#westrock  #wrk  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis