Packaging Corporation of America’s (PKG - Free Report) shares were relatively flat on March 27 as investors reacted tepidly on the restructuring plans for its DeRidder, Louisiana mill. The strategic move is the latest ploy to increase profitability of this containerboard and corrugated packaging products manufacturer.
In its detailed announcement, the company dismissed speculations of converting its idled No. 2 paper machine (D2) at the mill for producing containerboard. On the contrary, Packaging Corporation decided to convert the No. 3 newsprint machine (D3) at the manufacturing facility for producing both lightweight linerboard and medium containerboard to justify operating economics. The D3 machine would continue its normal newsprint production till mid-September, before winding down its operations to convert to containerboard production for start-up by early November.
While elaborating on the rationale behind the decision, Packaging Corporation highlighted that D3 conversion was much more profitable in the long run compared with D2. The company estimated that at conversion costs of $115 million with annual containerboard capacity of 355,000 tons, D3 was comparatively cost-effective to D2 which required conversion costs of $160 million for annual containerboard capacity of 300,000 tons.
In addition, discontinued newsprint production will also offer 100,000 tons of low-cost virgin fiber for higher volume of containerboard assembly at the mill. This in turn will reduce the consumption of higher cost recycled fiber (OCC) for an after-tax discounted cash flow return of 30–35% compared to less than a 20% return on the D2 project.
Based in Lake Forest, Illinois, Packaging Corporation is the fourth largest producer of containerboard and corrugated packaging products in the United States and the third largest producer of uncoated freesheet paper in North America. The company manufactures a range of linerboard and corrugating medium and other products such as multicolor boxes, 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.
Packaging Corporation currently has a Zacks Rank #1 (Strong Buy). Other well-performing stocks that are worth a look now include Neenah Paper, Inc. (NP - Free Report) , Resolute Forest Products Inc. and Stora Enso Oyj (SEOAY - Free Report) . All three stocks carry the same Zacks Rank as Packaging Corporation.