Packaging Corp (PKG) Q3 Earnings Beat, Sales Lag on Low Volumes
Packaging Corporation of America PKG reported adjusted earnings per share (EPS) of $2.05 in the third quarter of 2023, beating the Zacks Consensus Estimate of earnings of $1.92 per share by 7%. The bottom line was higher than the company’s provided guidance of earnings of $1.88 per share but marked a 28% decline year over year.
The downside was primarily caused by lower volumes in both the Packaging and Paper segments. Lower price and mix in the Packaging segment combined with higher depreciation expense, tax rate and other expenses added to the headwinds. Nonetheless, higher prices and mix in the Paper segment, a lower share count as well as reduced scheduled maintenance outage expenses in the quarter offset some of these negatives. The company also witnessed declines in operating, converting and freight costs, which proved favorable to earnings in the quarter.
Including one-time items, earnings in the reported quarter were $2.03 per share compared with the prior-year quarter’s earnings of $2.80 per share.
Packaging Corporation of America Price, Consensus and EPS Surprise
Packaging Corporation of America price-consensus-eps-surprise-chart | Packaging Corporation of America Quote
Operational Update
Sales in the third quarter fell 9% year over year to $1.94 billion due to low volumes. The top line missed the Zacks Consensus Estimate of $1.96 billion.
The cost of products sold was down 5.2% year over year to $1.5 billion in the reported quarter. Gross profit fell 20% year over year to $413 million. Selling, general and administrative expenses totaled $144 million compared with the prior-year quarter’s $145 million. Adjusted operating income slumped 28% year over year to $261 million.
Segment Performances
Packaging: Sales in this segment decreased 9% year over year to $1.76 billion in the third quarter of 2023. The figure lagged our estimate of $1.77 million. We had anticipated a volume decline of 3.4% and an unfavorable price and mix impact of 5.4%.
In the Packaging segment, total corrugated products shipments per day rose 1.9% year over year. We had anticipated a 3.2% decline in daily shipments.
Containerboard production was reported at 1,118,000 tons for the quarter, higher than our expectation of around 1,068,750 tons. Containerboard inventory was down 84,000 tons year over year and down 12,000 tons sequentially, reflecting better-than-expected demand.
Adjusted operating profit was $257 million, a 29% drop from $362 million in the prior-year quarter. The figure was higher than our projection of adjusted operating income of $242 million as costs were lower-than-expected in the quarter.
Paper: The segment’s revenues were $158 million in the July-September quarter, down 4.5% year over year. It missed our estimate of $166 million. The segment’s sales volume was down 10,000 tons compared with the third-quarter 2022 levels. However, compared with the second quarter of 2023, volumes picked up 14,000 tons.
We had expected a positive pricing/mix impact of 5.3% in the third quarter. Volume was expected to be a negative 4.7%.
The Paper segment reported an adjusted operating profit of $30 million, a 10% improvement from the year-ago quarter’s $27 million. It also came in higher than our projection of an adjusted operating income of $29 million for the segment, which reflected better-than-expected volume performance and lower costs.
Cash Position
Packaging Corp ended the third quarter of 2023 with a cash balance of $726 million compared with $794 million at the end of the prior-year comparable quarter. PKG’s capital spending through the third quarter was $90 million, lower than $180 million in the third quarter of 2022.
Outlook
Packaging Corp projects fourth-quarter 2023 EPS to be $1.76. For the Packaging segment, the company expects a sequential improvement in shipments per day despite one less shipping day for the corrugated business. The company will work toward bringing its inventories back to normal levels by restarting the No. 3 machine at the Wallula mill during the fourth quarter.
Pricing is, however, likely to be lower due to the majority of the May decrease in the published benchmark index grades being realized throughout the third quarter as well as a seasonally less rich mix.
In the Paper segment, volumes are expected to lower compared with the third quarter of 2023, which witnessed seasonally stronger demand. Prices are suggested to trend lower based on the recent declines in index prices.
Operating and converting costs are anticipated to be slightly higher primarily due to elevated recycled fiber prices, seasonal energy costs as well as costs associated with the re-start of the Wallula mill. While depreciation expense is expected to be slightly higher, it will be offset by expected lower scheduled maintenance outage expense. Due to these factors, the fourth-quarter EPS projection hints at a year-over-year decline of 25.1%.
Price Performance
Packaging Corp’s shares have gained 24.3% in the past year against the industry’s 4.4% fall.
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Zacks Rank
Packaging Corp currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other Stocks to Consider
Some other top-ranked stocks from the Industrial Products sector are Applied Industrial Technologies AIT, Astec Industries, Inc. ASTE, and Brady BRC. Each of these stocks sport a Zacks Rank of 1.
Applied Industrial has an average trailing four-quarter earnings surprise of 15%. The Zacks Consensus Estimate for AIT’s 2023 earnings is pegged at $9.13 per share, which indicates year-over-year growth of 2%. The estimate has moved up 2% in the past 60 days. Its shares have gained 34% in the last year.
Astec has an average trailing four-quarter earnings surprise of 20%. The Zacks Consensus Estimate for ASTE’s 2023 earnings is pegged at $3.24 per share. It indicates year-over-year growth of 163%. The consensus estimate for 2023 earnings has moved 1% north in the past 60 days. ASTE’s shares have gained 11% in the last year.
The Zacks Consensus Estimate for Brady’s 2023 EPS is pegged at $3.62. The consensus estimate for 2023 earnings has moved 13% north in the past 60 days and suggests year-over-year growth of 9.9%. It has a trailing four-quarter average earnings surprise of 7.2%. Shares of BRC rallied 19% in the last year.
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