A month has gone by since the last earnings report for Packaging Corp. (PKG). Shares have added about 3.1% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Packaging Corp. due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Packaging Corp Q3 Earnings Beat, Sales Lag on Low Volumes
Packaging Corporation 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.
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.
Packaging: Sales in this segment decreased 9% year over year to $1.76 billion in the third quarter of 2023. 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.
Paper: The segment’s revenues were $158 million in the July-September quarter, down 4.5% year over year. 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.
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.
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. The fourth-quarter EPS projection hints at a year-over-year decline of 25.1%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
Currently, Packaging Corp. has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Packaging Corp. has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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