JP Morgan Initiates Coverage On Graphic Packaging At Neutral, $6 PT

JP Morgan views Graphic Packaging GPK as a hybrid paper/packaging company given its primary products, end markets and financial/valuation characteristics. The biggest challenge JP Morgan sees for GPK is near-term price/cost, given its price recovery time lag in a rising input cost environment. However, productivity has more than offset in recent quarters, evidence of solid management execution. JP Morgan has a favorable view of GPK's primary boxboard end markets, where it sees modestly positive demand growth in coming years and limited risk of incremental supply. With 56% share of CUK and only one other producer, JPM thinks supply discipline and pricing should remain relatively favorable. It is important to consider GPK's high D&A versus peers and $1.3B in NOLs. On this basis, the company has what JPM views as a solid 12% FCF yield, in line with paper peers, with a historically more stable earnings stream. That said, margins are currently below those of paper peers in its paper coverage universe, a partial offset. Graphic Packaging is trading lower at $5.61