What: Shares of paper and packaging companies KapStone Paper & Packaging (KS) and WestRock Co. (WRK -0.29%) tumbled on Monday following an analyst downgrade for KapStone. At 10:45 a.m. ET, KapStone stock was down about 16%, while WestRock stock was down about 11%.
So what: Macquarie downgraded KapStone from neutral to underperform on Monday, a move that affected both KapStone's and WestRock's stock. Shares of both companies carved out new 52-week lows thanks to the downgrade. Over the past year, KapStone is down about 52%, while WestRock has slumped 48%.
Previously, Macquarie downgraded KapStone in June from outperform to neutral, citing concerns that margins and earnings had peaked. Increased competition and price cuts on both containerboard and linerboard were cited by Macquarie analyst Al Kabili, giving him reason to be cautious on all containerboard stocks.
Now what: While analyst upgrades and downgrades should always be taken with a grain of salt, profitability does tend to fluctuate for both KapStone and WestRock, and both companies have recently suffered from slumping earnings. During the third quarter, KapStone's GAAP net income declined by 37% year over year, driven by a lower gross margin and higher operating expenses. Meanwhile, WestRock's results were similar, with GAAP net income declining by 25% year over year during the fiscal fourth quarter.
There's now a lot of pessimism priced into both stocks, with both looking cheap relative to trailing earnings, but investors should take Macquarie's concerns seriously.