Packing Company of America PKG is well positioned to take advantage of e-commerce driven demand for strong packaging and higher requirements for meat, produce, processed foods, beverages, drugs and other consumer products. The focus on acquisitions to expand the containerboard and corrugated product portfolio and pricing initiatives are likely to support results.
Packaging Corp currently has a Zacks Rank #2 (Buy) and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold), offer the best investment opportunities. You can see the full list of today’s Zacks #1 Rank stocks here.
Optimistic outlook: Packaging Corp forecasts earnings per share (EPS) of approximately $2.83 in the second quarter of 2022. Forecasts point to 30% year-over-year growth. Its Packaging segment will benefit from continued strong demand. It will continue to implement previously announced price increases in both segments, which will help offset the impact of cost inflation.
Solid financial situation: The company completed its debt refinancing in October 2021, which extended the overall term of its debt from 8.5 years to 16.3 years and lowered its overall interest rate from 3.9% to 3.5 %. PKG’s total debt to total capital ratio was 0.40 as of March 31, 2022, below the industry’s 0.63. The company’s interest earned ratio has improved over the past few years and currently stands at 9.3, higher than the industry’s 7.5. The company maintains a balanced approach to capital allocation to drive growth and maximize shareholder returns. The company’s board of directors approved a $1 billion buyout authorization in January 2022. In the first quarter, the company paid out $93.6 million in dividends to shareholders.
Positive growth expectations: Zacks consensus estimate for the company’s current-year EPS is currently pegged at $11.66, indicating 24.2% year-over-year growth. The same for 2023 stands at $12.23, suggesting a 5% year-over-year improvement.
History of positive results: Packaging Corp has a surprise on earnings for the last four quarters of 19.6%, on average.
Superior return on assets: Packaging Corp currently has a return on assets (“ROA”) of 12.1%, higher than the industry’s 6.9%. An above-average ROA indicates that the company generates profits by effectively managing its assets.
Growth engines in place
Demand in the packaging segment, which accounts for 91% of company revenue, continues to be strong. Packaging products are essential for the distribution of food, beverage and pharmaceutical products. Therefore, the packaging segment continues to benefit from the high demand for meat, fruits and vegetables, processed foods, beverages, medicines and other consumer products.
Demand for corrugated and corrugated products remains strong in most of the company’s end markets. Apart from this, Packaging Corp will continue to benefit from the e-commerce boom which has led to an increase in the demand for boxes.
Packaging Corp completed the scheduled maintenance shutdown at the Jackson mill during the third quarter of 2021. The mill restarted the number 1 machine and began producing uncoated fine papers. This machine will help meet high customer demand for the crate factory and maintain targeted inventory levels. In addition, machine number 3 in the plant produces linerboard to meet strong packaging demand and to maintain appropriate inventory levels in the packaging segment. In February 2021, the company announced the discontinuation of production of uncoated fine papers (UFS) on the machine and its intention to permanently convert the machine to produce linerboard in a phased approach over the next three years. This move will provide much-needed in-house linerboard supply and allow the company to optimize and improve current mill capacity and box mill operations.
In December 2021, Packaging Corp acquired all of the assets of Advanced Packaging Corporation in a cashless transaction. The deal supports Packaging Corp’s focus on enhancing its packaging board portfolio through organic box volume growth and strategic box mill acquisitions. The company’s containerboard integration is expected to increase by nearly 80,000 tons. This will increase plant capacity and box plant operations. The deal is expected to be earnings accretive this year.
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Packaging Corp shares have gained 0.2% over the past year against a 4.9% decline for the industry.
Other actions to consider
Some other leading stocks in the industrials sector are Graphic packaging holding company GPK, Myers Industries MYE and Avery Dennison Company AVY. While GPK and MYE carry a Zacks Rank #1, AVY carries a Zacks Rank #2.
Graphic Packaging has an estimated profit growth rate of 86.8% for the current year. Over the past 60 days, the Zacks consensus estimate for current-year earnings has been revised up 7.6%.
Graphic Packaging has realized an earnings surprise for the last four quarters of 7.2% on average. The company’s shares appreciated 14.8% in one year.
Myers Industries forecasts a 67% earnings growth rate for 2022. Zacks’ consensus estimate for current-year earnings is up 27% over the past 60 days.
MYE has a last four quarter earnings surprise of 20.1% on average. Shares of Myers Industries have gained 13% over the past year.
Avery Dennison forecasts a profit growth rate of 8.9% for the current year. The Zacks consensus estimate for 2022 revenue has moved north 0.8% in the past 60 days.
Avery Dennison posted a four-quarter earnings surprise of 5.3% on average. AVY has a long-term earnings growth rate of 7%.
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