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Packaging Corporation of America

PKG

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Packaging Corporation of America (PKG - Snapshot Report) reported upbeat second quarter results on July 17th, including a 25.6% year-over-year jump in earnings per share. Analysts made significant upward revisions to their estimates for fiscal years 2012 and 2013 in response, helping the stock achieve a Zacks #2 Rank (Buy).

In addition to strong earnings growth, this North American integrated producer of containerboard and corrugated packaging products pays a dividend that yields a solid 3.3%.

Second Quarter Results

Packaging Corporation’s second quarter earnings came in at 49 cents per share, surpassing the Zacks Consensus Estimate of 46 cents by 6.5%. This marked the fifth straight quarter with a positive earnings surprise. Growth in earnings was driven by increased sales volume of containerboards and corrugated products. The company also benefited from minimized production costs.

Net sales for the quarter grew 7.0% year over year and 6.1% sequentially to $712 million, comprehensively beating the Zacks Consensus Estimate of $690 million.

Shipments for corrugated products surged 6.6% year over year. However, outside sales of containerboards declined from the year-earlier quarter. The production of containerboard jumped 5.3% year over year to 638,000 tons.

Gross profit in the quarter was up 15.5% year over year to $158.1 million, while gross margin came in at 22.2%, versus 20.6% in the year-ago quarter and 21.6% in the previous quarter. Selling and administrative expenses amounted to $52.9 million, compared with $48.2 million in the previous year quarter.

Improved corrugated product shipments, enhanced mill operations and reduced expenses boosted the company’s performance in the quarter. Moreover, there was a rise in export prices compared to the previous quarter.

Strong Guidance and Estimate Revisions

The company is positive that its revenue accruing from corrugated products will be enhanced in the coming quarter. In addition, the production from its mills at Counce and Valdosta is expected to improve with reduced cost of production, as the company has commenced energy optimization projects at these mills that are expected to reduce fuel and electricity purchases. Including these factors, management expects that the earnings per share for the third quarter of 2012 will be 54 cents.

Analysts raised their estimates considerably for 2012 and 2013. In the past 7 days, the Zacks Consensus Estimate for fiscal 2012 rose 3.7% to $1.95 per share as 10 of 11 estimates were revised upward. This implies a year over year growth of 21.0%. Similarly for 2013, the Zacks Consensus Estimate increased 2.7% to $2.30, driven by upward revisions in all 11 estimates.

As is evident from the chart below, the stock price has been rising since the beginning of this year and has also outperformed its 200-day moving average line (SMA 200).

Dividend

Packaging Corporation has been consistently paying dividends to its shareholders since December 2003. The company recently raised its quarterly dividend from 20 cents to 25 cents a share, which affirms a dividend yield of 3.3%.

Valuation Looks Reasonable

Packaging Corporation of America trades in line with its peer group average with respect to its forward earnings at 15.7x. While the price to book ratio indicates a premium to its peer group’s 1.98, this is justified given its ROE of 18.1%, compared with the peer group average of 14.4%.

Headquartered in Lake Forest, Illinois, Packaging Corporation of America is a North American integrated producer of containerboard and corrugated packaging products. Packaging Corporation is the fifth largest low-cost producer of containerboard in the United States. The company manufactures a range of linerboard and corrugating medium and other products such as multicolor boxes, and displays used to merchandise products in retail locations, and special design/application boxes used in the food and agriculture industry. The company is also involved in the production of meat boxes and wax-coated boxes for the agricultural industry. The company has a market capitalization of $2.9 billion.

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