WRK Chart

Rock-Tenn and Meadwestvaco completed their merger to form WestRock two months ago. It's already been a wild ride for the stock. WRK data by YCharts.

Eight weeks ago, two of the biggest names in the cardboard box industry merged to form WestRock Company (NYSE:WRK). Four weeks ago, WestRock reported earnings for this new $10 billion-a-year colossus, revealing to investors how the combination of Rock-Tenn and Meadwestvaco is working out. Two weeks ago, WestRock announced it was merging again, adding recycled cardboard manufacturer SP Fiber to the mix.

With so many changes happening so fast, it's high time we took a closer look at this company. Because going forward, WestRock is almost certain to be a major player in the new e-commerce economy, in which each passing day sees more and more of the things we buy delivered direct to our doorstep in cardboard boxes.

What is WestRock?
For an authoritative opinion on what exactly WestRock is today -- and how its numbers stand today -- we turn to S&P Capital IQ for the latest facts and figures. Here's how they look:

WestRock Company ($61.75 at open on Friday)

Market capitalization

$15.9 billion

Long-term debt (net of cash)

$2.5 billion

Revenue

$10.1 billion

Net income

$545 million

Free cash flow

$704 million

Dividend yield

2.1%


WestRock has four main lines of business:

  • Corrugated packaging (cardboard boxes, of which it sells $7.1 billion worth annually)
  • Consumer packaging (product boxes inside those cardboard boxes, a $2 billion business)
  • Merchandising displays (also usually made of cardboard -- $875 million)
  • Recycling (of cardboard, naturally. At $337 million annually, this is WestRock's smallest business.).

So as you can see, with cardboard boxes for transportation of goods making up more than 70% of WestRock's revenues, WestRock is "more than just a cardboard box company," but not much more. This company lives and dies by the cardboard box business.

How is WestRock doing?
Now that we know what WestRock is and what WestRock does, let's take a quick look at how well they're doingit. According to WestRock's first post-merger earnings report, released late last month, the company's fiscal third quarter featured:

  • Combined net sales of $4 billion, down about 1% from last year's third-quarter results
  • Operating profits of $502 million -- up 10%
  • Earnings per diluted share of $1.10 -- up 21%.

Year to date, earnings for the company amount to $2.74 per diluted share, a 23% improvement over what the two components of WestRock had earned together by this time last year.

Free cash flow performance looks similarly good. WestRock generated $142 million in cash profit in its fiscal third quarter, or more than twice what its component companies produced in fiscal third-quarter 2014. Year-to-date free cash flow comes to $456 million -- a 23% improvement.

Valuation
Importantly, free cash flow at WestRock nicely exceeds reported net income. As a result, it's certainly valid to look at the company and say it appears expensive at 28.5 times earnings. But it's just as valid to say that thanks to WestRock's strong free cash flow, the stock sells for just 22 times FCF -- and if it can keep on growing FCF in the low-20% range, the stock might not be expensive at all.

Granted, analysts don't happen to believe that will happen. Current Wall Street estimates call for WestRock to grow its profits at only about 10% annually over the next five years. This suggests that the stock could be overvalued whether weighed on its GAAP earnings or its actual free cash flow -- either one.

Of course, you wouldn't know that before taking a close look at WestRock's numbers. But lucky for you, now you have!

Rich Smith does not own shares of, nor is he short, any company named above. You can find him on our virtual stock-picking service, Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 321 out of more than 75,000 rated members.

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