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Is a Beat in Store for Packaging Corp (PKG) in Q4 Earnings?

Zacks Equity Research

Packaging Corporation of America PKG is scheduled to report fourth-quarter 2017 results after the market closes on Jan 30.

Last quarter, the company’s adjusted earnings missed the Zacks Consensus Estimates. Notably, Packaging Corporation’s earnings have surpassed estimates in three out of the trailing four quarters, with an average positive earnings surprise of 2.6%.

Packaging Corporation’s fourth-quarter results are anticipated to benefit from strong demand, price increases and the DeRidder mill improvement despite seasonally lower volumes and hurricane-related impacts. Over the past year, the company’s shares have rallied 27.4%, outperforming 12.4% growth recorded by the industry it belongs to.

Let’s see how things are shaping up for Q4 earnings.

Packaging Corporation of America Price and EPS Surprise


Packaging Corporation of America Price and EPS Surprise | Packaging Corporation of America Quote

Factors at Play

Packaging Corporation projects the packaging segment demand to remain solid in the fourth quarter compared to the prior quarter. It expects that fourth-quarter earnings will be $1.50 per share. We expect net sales for the quarter will be around $1.6 billion, reflecting growth of 6.7% year over year. Further, the Zacks Consensus Estimates for the company’s EPS is pegged at $1.51 for fourth-quarter 2017, marking 22.8% improvement year over year.

In the Paper segment, the company has started implementing the recently-announced price increases, which will aid margin performance in the quarter to be reported. Our consensus estimates indicate that sales of Packaging Corporation’s Paper segment will reach $253 million in the to-be-reported quarter, flat year over year. The Zacks Consensus Estimate for segment operating income is pegged at $15.8 million for the quarter, representing an year over year decline of 56%.

The Packaging segment, which generates around 82% of the company’s revenues, recorded sales growth of around 15% and segment EBITDA increment of roughly 33% in the third quarter. The Zacks Consensus Estimate for Packaging segment sales is pegged at $1.35 billion for the to-be-reported quarter, reflecting 12.5% year over year growth. Our consensus estimates indicate that segment operating income of the segment will reach $244 million in the to-be-reported quarter, relecting an year over year growth of 33%.

Notably, Packaging Corporation estimates production to be up around 150,000 tons in 2017 over the prior year, on the back of efficiency improvements at both DeRidder No. 1 and DeRidder No. 3 mills. The consensus estimates indicate that containerboard production for the company will reach around 982,000 tons, up around 2.1% from 962,000 tons recorded in the fourth-quarter 2016.

However, the company is expected to witness seasonally lower volumes in the fourth quarter. Higher wood and energy costs, along with higher prices for certain key chemicals and higher freight costs due to recent hurricanes will also hurt the performance of this quarter.

Additionally, Packaging Corporation’s results for full-year 2017 will be affected by total property damage and business interruption losses, including capital cost related to the DeRidder incident, in the range of $20-$25 million. The company’s planned annual maintenance outages will also impact its performance.

Earnings Whispers

Our proven model shows that Packaging Corporation is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen.

Zacks ESP: The Earnings ESP for Packaging Corporation is +0.44%. This is because the Most Accurate estimate of $1.52 comes in higher than the Zacks Consensus Estimate of $1.51. A favorable Earnings ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Packaging Corporation currently carries a Zacks Rank #3. It should be noted that stocks with a Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings.

Conversely, stocks with a Zacks Rank #4 or 5 (Sell rated) should never be considered going into an earnings announcement.

The combination of Packaging Corporation’s Zacks Rank #3 and Earnings ESP of +0.44% makes us confident of a likely earnings beat.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Graphic Packaging Holding Co. GPK, with an Earnings ESP of +0.26% and a Zacks Rank #2. Its shares have gained 13.9%, over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Sealed Air Corp. SEE, with an Earnings ESP of +2.05% and a Zacks Rank #3. The company’s shares have been up 7.7% during the same time frame.

Greif, Inc. GEF, with an Earnings ESP of +8.73% and a Zacks Rank #3. The stock has gained 9.6% in six months’ time.

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