Insights

Why Clearwater Paper Stock Skyrocketed 22% Today

What happened

Shares of cardboard, tissue paper, and paper towel producer Clearwater Paper (NYSE: CLW) had soared 22% through 12:25 p.m. ET on Wednesday. Astoundingly, this happened after Clearwater reported an earnings miss instead of an earnings beat.  

Heading into the second quarter of 2022, analysts had forecast that Clearwater would earn $1.11 per share on quarterly sales of just under $499 million. The company beat that sales estimate, collecting $526 million in the quarter. Earnings, however, missed expectations badly, coming in at just $0.86.

So what

So why are investors bidding up Clearwater stock today (not just a little bit, but a lot) by 22%?

Sales growth probably has a lot to do with investor enthusiasm today. Clearwater didn’t just beat on sales, it grew its sales 30% year over year in the second quarter as inflation drove up the cost of raw materials — and the company raised its prices in tandem.

Clearwater was able to achieve “improved pricing,” as CEO Arsen Kitch put it, in both its cardboard and tissue businesses. Demand for both products was strong, and driven in particular by consumer demand for private-label brands. That might not be great news for brand names like Kleenex, but clearly helped out Clearwater a lot.

And as for the earnings miss, it’s true that Clearwater didn’t earn quite as much as Wall Street wanted, but even $0.86 per share in profit was a whole lot better than the $3.10-per-share loss that the company reported a year ago.

Now what

Can Clearwater keep earning money this year, though? On the one hand, management acknowledged that “inflation remains a key theme in both of our businesses,” and warned that this will continue at least into the third quarter. On the other hand, though, Clearwater sounds committed to raising prices as needed to offset the rising cost of raw materials.

At the very least, that should help to keep revenue growing, and investors did seem pleased by the revenue growth shown in the second quarter. And if Clearwater is able to keep growing sales faster than its costs increase (in the second quarter, for example, revenue rose nearly twice as fast as cost of goods sold), that should be good news for its profits as well.

With analysts forecasting $3.64 per share in earnings this year, and Clearwater stock therefore selling for less than 12 times current-year earnings, even just moderate profit growth could be enough to make the stock look like a clear-cut bargain.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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