On Sep 22, we issued an updated research report on Packaging Corporation of America PKG. The company is gaining 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 the company’s healthy balance sheet will drive growth. However, increased digitization and lower paper consumption in schools and offices due to the pandemic are concerns.
Packaging Demand to Spur Growth
Packaging products are essential for the distribution of food, beverage and pharmaceutical products. Hence, the packaging segment, which contributes around 85% of the company’s revenues 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 spur demand for boxes.
Mill Conversion to Aid Growth
Packaging Corporation discontinued the production of uncoated free sheet and coated one-side grades at the Wallula, WA mill, and converted the No. 3 machine into a virgin kraft linerboard machine with an annual capacity of 400,000 tons. The conversion resulted in production of lighter-weight high-performance linerboard grades, which will assist the company in optimizing the entire containerboard system platform, and reduce its logistics and freight costs. This move will help boost its profitability and margins in the paper segment.
Strong Liquidity Bode Well
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 reduce 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. To balance the supply of Boise Paper products with demand, Packaging Corporation has, thus, announced plans to temporarily idle both paper machines and the sheet-converting operation at its Jackson Mill in Jackson, AL for May and June. This move will reduce paper production by approximately 70,000 tons. Also, the paper segment continues to bear the brunt of bleak uncoated freesheet market.
The stock has gained 9.4% over the past three months, outperforming the industry’s growth of 9.3%.
Zacks Rank & Stocks to Consider
Packaging Corporation currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Industrial Products sector include Astec Industries, Inc. ASTE, Berry Global Group, Inc. BERY and SiteOne Landscape Supply, Inc. SITE. While Astec and Berry sport a Zacks Rank #1 (Strong Buy), SiteOne carries a Zacks Rank of 2 (Buy), currently. You can see the complete list of today’s Zacks #1 Rank stocks here.
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.
Berry has a projected earnings growth rate of 32.3% for fiscal 2020. The company’s shares have appreciated 21.8% over the past year.
SiteOne Landscape has an expected earnings growth rate of 15.4% for the current year. The stock has surged 61.6% in the past year.
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