The container and packaging stocks to own in 2024, according to Wells Fargo

Looking toward 2024 for packaging and container companies, Wells Fargo expects a similarly weak consumer demand environment, which continues to negatively impact first half of the year volumes, followed by cautious optimism in the second half as companies in the sector lap de-stocking trends. The firm expects pro-cyclical names to outperform consumer-oriented ones given an earlier start of the de-stocking cycle, followed by dovish Fed policy. Wells upgraded Greif (GEF) and Sealed Air (SEE) to Overweight, while moving to the sidelines on WestRock (WRK).

2024 OUTLOOK: Discussing the outlook for the containers and packaging space, Wells Fargo says it is tweaking its balanced “barbell” approach to be a bit more pro-cyclical given signs that de-stocking is largely complete and early signs of margin expansion in containerboard and uncoated recycled paperboard, or URB.

Looking at 2024, the firm expects a similarly weak consumer demand environment, which continues to negatively impact first half of the year volumes, followed by cautious optimism in the second half as companies lap de-stocking trends. Wells expects pro-cyclical names to outperform consumer-oriented given an earlier start of the de-stocking cycle, followed by dovish Fed policy. Selectivity and company-specific catalysts will remain a key differentiator for stock selection, the firm argues.

KEY THEMES FOR 2024: Among the key factors Wells believes will affect packaging stocks in 2024 are basic fundamentals for packaging substrates; an update on inflation/input costs, where Paper Packaging producers maintain real pricing power; potential for ongoing M&A activity; and valuation levels that are likely to remain at or slightly above historical averages.

BUY GREIF, SEALED AIR: Given Wells’ constructive outlook on the containerboard market as well as value-based names that have catalysts to outperform in 2024, the firm is upgrading Grief and Sealed Air to Overweight. Wells is also downgrading WestRock to Equal Weight. As the latter is currently trading at a fairly tight spread with the Smurfit Kappa (SMFKY) proposed acquisition price, it views the stock as fairly valued.

FAVOR CBOARD VS. BOXBOARD: The firm believes containerboard fundamentals have turned more attractive compared to the boxboard market, given capacity curtailments plus permanent reductions. While operating rates remain below the 93%-95% range, Wells envisions success from current price initiatives based on low customer inventory levels, higher OCC, and converting costs. Contrary to the containerboard market, it believes boxboard will remain pressured by soft demand and increased competition from foreign producers. On one side, the firm recommends high quality/low risk such as AptarGroup (ATR) and, on the other end, names like Berry Global (BERY), Greif and Sealed Air with more leverage to a recovery.