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Why Is Packaging Corp. (PKG) Down 8% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Packaging Corp. (PKG). Shares have lost about 8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Packaging Corp. due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Packaging Corp Q1 Earnings Beat, Sales Miss Estimates

Packaging Corporation of America delivered adjusted earnings per share of $1.98 in first-quarter 2019, surpassing the Zacks Consensus Estimate of $1.96. The reported figure also climbed 27.7% year over year. Earnings came in above management’s guidance of $1.97 per share. Results benefitted from higher prices and mix in both the Packaging and Paper segments, as well as lower annual outage expenses. However, lower volume in the Paper segment as well as higher material costs, fixed expenses and indirect and converting costs negated some of the gains.

Including one-time items, earnings came in at $1.97 per share compared with $1.48 earned in the year-ago quarter.

Operational Update

Sales for the first quarter were $1.73 billion, up 2.5% from $1.69 billion generated in the year-earlier quarter. The reported figure, however, lagged the Zacks Consensus Estimate of $1.75 billion.

Cost of products sold declined 1.7% year over year to $1,312.3 million in the first quarter. Gross profit increased around 18.3% to $421 million from $356 million witnessed in the prior-year quarter. Selling, general and administrative expenses flared up 3.7% to $140 million from $135 million incurred in the year-ago quarter.

Segmental Performance

Packaging: Sales in this segment went up to $1,477.6 million, reflecting year-over-year rise of 5.3%. Segmental income, excluding special items, came in at $250 million in the March-end quarter compared with $225 million witnessed in the comparable period last year.

Printing Papers: This segment’s revenues slipped 11% year over year to $239.7 million in the quarter due to discontinuation of the paper business in the Wallula Mill. Segmental income, excluding special items, increased to approximately $46 million from the January-March quarter from $16 million in the year-earlier period.

Cash Position

At the end of the first quarter, the company had a cash balance of $442.4 million compared with $102.4 million recorded at the end of the prior-year quarter.

Outlook
 
Packaging Corporation projects earnings per share of around $2.05 for second-quarter 2019, up from the prior view of $1.97. It anticipates higher product shipments with lower prices in the Packaging segment. The Paper Segment is expected to incur higher outage costs due to the annual shutdown in the International Falls mill. Nonetheless, the company expects higher freight, repairs and fixed costs, as well as higher share-based compensation costs across its segments in the second quarter. Packaging Corporation expects improved energy costs due to a seasonally milder weather.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Packaging Corp. has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Packaging Corp. has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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