Why have third-quarter earnings expectations turned cautious?

  • At the start of the third quarter, investors had expected energy prices to fall and consumer confidence to improve. Instead, oil prices again exceeded 100 dollars per barrel during the quarter, and confidence weakened. Wells Fargo expects weak volumes and margin pressure to affect both results and outlooks.
  • Companies with fiscal years ending in December typically narrow their full-year guidance when reporting third-quarter results. The bank expects most companies also to lower guidance, especially those that had relied on a second-half macroeconomic improvement for growth; their comments on 2027 may lack detail.
  • The University of Michigan consumer sentiment index fell from 55.2 in July to a preliminary 46.3 in October. Although actual consumer spending has so far been more resilient than sentiment indicators, the bank still expects consumers to choose lower-priced goods and promotions more often, and customers to be more cautious in placing orders and managing inventory and cash at year-end.

Why will cost pressure persist into the fourth quarter?

  • Crude oil averaged 87 dollars per barrel in the third quarter, down 9% quarter on quarter and up 32% year on year. The quarterly average masked a monthly rebound: oil prices rose 15% in September from August. Old corrugated container raw material averaged 82 dollars per ton in the third quarter, up 23% quarter on quarter and 42% year on year.
  • The month-end diesel price rose from 4.00 dollars per gallon in July to 5.15 dollars in September. Over the same period, trucking rates fell from their highs, but carriers are absorbing part of the fuel costs; if diesel remains high, rates could face upward pressure.
  • Packaging companies typically pass on raw-material price increases through contracts or raise selling prices, but realization comes with a lag. Although resin prices have fallen from their crisis highs, Wells Fargo still expects companies that use large amounts of resin to face a temporary cash-flow drag.

Why are beverage cans relatively resilient?

  • Wells Fargo expects beverage-can volumes to be broadly stable or grow slowly: promotions support demand, and the shift from glass and plastic to aluminum cans can also bring share gains. The bank therefore lists Ball and Crown as preferred names for earnings season.
  • Resilience does not mean growth across the board. In the 12 weeks ended 3 October, total North American aluminum-can volumes rose just 0.1% year on year; beer fell 4.3%, soft drinks grew 2.4%, and energy drinks grew 5.9%.
  • Passing on costs also carries a demand-side cost. North American all-in aluminum costs fell 8% quarter on quarter in the third quarter but remained up 38% year on year. Can makers can pass raw-material costs to beverage customers, but subsequent price increases by beverage companies could suppress consumer demand.
  • Company performance also depends on customers and capacity. Ball’s third quarter was weighed down by limited available capacity and the ramp-up of new capacity; the additional capacity is expected to benefit volumes and efficiency in 2027. Crown’s European beverage-can business faces a high comparison base after growth of 12% in the prior-year period.

How do paper and pharmaceutical packaging companies differ?

  • Wells Fargo expects PKG to be better positioned than International Paper and Smurfit Westrock. PKG says its guidance has largely accounted for higher input costs and that efficiency improvements can offset slight volume pressure; the June price increase will be fully reflected in the fourth quarter, while the September increase will also begin contributing toward the end of the quarter.
  • By contrast, International Paper and Smurfit Westrock face a weaker European market and slower realization of price increases. The bank believes their full-year outlooks may be under pressure and that their valuation gap with PKG is unlikely to narrow this quarter.
  • Aptar’s potential improvement comes from its pharmaceutical business: the impact of destocking in the emergency-medicine channel is expected to be largely over by the end of the third quarter. Wells Fargo believes expectations for a return to the pharmaceutical business’s long-term growth target are not yet fully reflected; the weaker beauty business remains another point of concern.