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Packaging Corporation of America PKG is poised well to gain from the solid demand for packaging for food, beverage and pharmaceutical products in the wake of the coronavirus pandemic. Further, the e-commerce boom and a strong balance sheet will drive growth.
The stock has a long-term expected earnings per share growth rate of 5%. At present, Packaging Corporation carries a Zacks Rank #3 (Hold). It has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, offer the best investment opportunities for investors. You can see the complete list of today's Zacks #1 Rank stocks here.
In the past six months, the stock has gained 14.9% compared with the industry’s growth of 22.9%.
Let’s delve deeper into the factors that validate the company’s Zacks Rank #3.
Q2 Earnings Beat: Packaging Corporation reported adjusted earnings per share of $1.38 in the June-end quarter, surpassing the Zacks Consensus Estimate of $1.28.
Positive Earnings Surprise History: The company has a trailing four-quarter average earnings surprise of 8.47%.
Return on Assets: Packaging Corporation currently has a Return on Assets (ROA) of 8.5%, while the industry recorded ROA of 4.9%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.
Packaging products are essential for the distribution of food, beverage and pharmaceutical products. Hence, the packaging segment will keep benefiting from the elevated demand for meat, fruit and vegetables, processed food, beverages, medicine, and other consumer products owing to the coronavirus crisis. Further, Packaging Corporation will benefit from the e-commerce boom that will lead to increase in demand in boxes.
Over the past five years, Packaging Corporation’s debt has witnessed a CAGR of 2%, while its cash flow has seen a CAGR of 44%. Packaging Corporation ended second-quarter 2020 with $853 million of cash on hand or $977 million, including the cash recently moved to marketable securities. The company’s liquidity as of Jun 30, 2020 was more than $1.3 billion. This positions the company well to sail through the turbulent times.
However, there are a few factors that are likely to hinder growth in the near term.
The paper segment competes with electronic data transmission, e-readers, and electronic document storage alternatives. Increasing preference for these alternatives will have an adverse impact on traditional print media and paper usage, and lower demand for communication papers. This will dent the segment’s performance in the days to come. Apart from this, the coronavirus pandemic has affected paper consumption in schools, offices and businesses, further straining paper demand. Also, the paper segment continues to bear the brunt of a bleak uncoated freesheet market.
Stocks to Consider
Some better-ranked stocks in the Industrial Products sector include Silgan Holdings, Inc. SLGN, Astec Industries, Inc. ASTE and SiteOne Landscape Supply, Inc. SITE. While Silgan and Astec sport a Zacks Rank #1, SiteOne carries a Zacks Rank of 2, currently.
Silgan has a projected earnings growth rate of 28.7% for 2020. The company’s shares have appreciated 32.9% over the past year.
Astec has an estimated earnings growth rate of 13.5% for the ongoing year. The company’s shares have rallied 68.5% in a year’s time.
SiteOne Landscape has an expected earnings growth rate of 15.4% for the current year. The stock has surged 61.6% over the past year.
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