Packaging Corporation of America PKG is poised to gain from strong demand environment for both of its segments, as well as the e-commerce boom despite material cost inflation and higher maintenance outage.
The company outpaced the Zacks Consensus Estimate in all of the trailing four quarters, resulting in average positive earnings surprise of 2.89%. It has an estimated long-term earnings growth rate of 8.30%.
Price Performance: The stock has appreciated around 18.6% year to date, outperforming the industry’s gain of 14.2%.
Below, we briefly analyze the company's potential growth drivers and possible headwinds.
Factors Favoring Packaging Corporation
Positive Growth Projections: The Zacks Consensus Estimate for earnings is currently pegged at $8.45 for full-year 2019, reflecting year-over-year growth of 5.2%. For first-quarter 2019, the Zacks Consensus Estimate for earnings is pegged at $1.97, highlighting year-over-year growth of 27.3%.
Cheap Valuation: Packaging Corporation’s trailing 12-month EV/EBITDA ratio is 7.4, while the industry's average trailing 12-month EV/EBITDA is 11.3. Consequently, the stock is cheaper at this point based on this ratio.
Return on Assets (ROA): Packaging Corporation currently has a ROA of 11.9%, while the industry's ROA is 6.0%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.
Growth Drivers in Place
Solid Demand to Aid Packaging Corporation
Packaging Corporation expects that continued solid demand in the Packaging segment for both containerboard volume and corrugated products volume will aid its performance in the current quarter. Upbeat market conditions are also anticipated to continue in the Paper segment. The company expects first-quarter earnings of around $1.97 per share, reflecting 27% year-over-year increase.
Packaging Corporation to Gain From E-commerce Boom
Packaging Corporation will benefit from the e-commerce boom, which, in turn, will spur demand in boxes. These days, customers find a lot of different channels to sell-through, including e-commerce. The company has a wide base of customers and expects its business to grow in the near term.
Investment for Future Growth
The company maintains a balanced approach toward capital allocation in order to profitably grow the company, as well as maximize returns for its shareholders. The company ended full-year 2018 with $362 million of cash. In 2018, the company’s cash flow from operations was a record $1.18 billion and free cash flow was also at a record $629 million. Notably, during the year, Packaging Corporation approved a hike of 25% in its regular quarterly dividend. Capital expenditures during the year were $551 million. It estimates capital spending for 2019 to be $390-$410 million.
Favorable Rank, Score Combination: Packaging Corporation currently carries a Zacks Rank #3 (Hold) and a VGM score of A. Here V stands for Value, G for Growth and M for Momentum. The company’s score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. In fact, 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, make solid investment choices.
Further, the company has a return on equity — a profitability measure — of 30.8%, better than the industry average of 25.0%. This reflects the company’s efficiency in utilizing its shareholders’ funds.
Few Headwinds to Counter
The company anticipates higher labor and benefits costs, with annual wage increases and other timing-related expenses in the first quarter of 2019. Though costs for freight and recycled fiber will be fairly flat, most of chemical and repair, and materials costs will remain inflated. Further, a seasonally colder weather will lead to higher energy usage and wood costs. The tax rate is likely to be slightly higher. These factors will negatively impact earnings in the current year.
The impact of annual maintenance outages at the company’s mills in 2019 on lost volume, direct costs and amortized repair costs will collectively affect earnings per share by 59 cents for the current year. The current estimated impact by quarter in 2019 is 19 cents per share in the first quarter, 18 cents in the second quarter, 8 cents in the third and 14 cents per share in the fourth quarter.
Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.
Packaging Corporation of America Price and Consensus
Packaging Corporation of America Price and Consensus | Packaging Corporation of America Quote
Stocks to Consider
A few better-ranked stocks in the Industrial Products sector are Mueller Industries, Inc MLI, Lawson Products, Inc. LAWS and Albany International Corp. AIN, each sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Mueller Industries has an expected earnings growth rate of 2.2% for 2019. The company’s shares have gained 19.9%, over the past year.
Lawson Products has an expected earnings growth rate of 102.5% for the current year. The stock has appreciated 24.4% in a year’s time.
Albany International has an expected earnings growth rate of 44.7% for 2019. The company’s shares have rallied 17.3%, in the past year.
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