Back to top

Image: Bigstock

Packaging Corporation (PKG) Gains on E-commerce Demand, Costs High

Read MoreHide Full Article

On Mar 26, we issued an updated research report on Packaging Corporation of America (PKG - Free Report) . Demand in the company’s packaging segment remains strong backed by e-commerce and rising requirement for meat, fruit and vegetables, processed food, beverages, medicine, and other consumer products. However, lower paper consumption due to the impact of the pandemic and increased digitization, and higher costs remain near-term headwinds.

Packaging & E-Commerce Demand to Boost Revenues

Demand in the Packaging segment, which accounts for 85% of Packaging Corporation’s revenues, has remained strong amid the pandemic. Packaging products are essential for the distribution of food, beverage and pharmaceutical products. Hence, the Packaging segment continues to benefit from the elevated demand for meat, fruit and vegetables, processed food, beverages, medicine, and other consumer products owing to the coronavirus crisis. Notably, the company’s corrugated products plants set new all-time quarterly records in fourth-quarter 2020.

Increasing sales of e-commerce has increased the importance of packaging since the products need to be delivered in the best of conditions to the consumer. Further, with consumers forced to stay at home amid the coronavirus crisis, the consequent surge in e-commerce demand is also working in favor of Packaging Corporation and other packaging solution providers like Amcor plc (AMCR - Free Report) , Sealed Air Corporation (SEE - Free Report) and International Paper Company (IP - Free Report) .

Strong Balance Sheet Bodes Well

In 2020, the company’s cash from operations was $1.03 billion. The company’s liquidity as of Dec 31, 2020 was close to $1.5 billion. Over 2015-2019, Packaging Corporation’s debt has witnessed a CAGR of 2% while its cash flow has seen a CAGR of 44% over the same time frame. The company maintains a balanced approach toward capital allocation in order to boost growth and maximize returns for shareholders. For 2021, it projects total capital expenditures between $500 million and $525 million.

Weak Paper Demand a Woe

The pandemic has impacted paper consumption in schools, offices and businesses, straining paper demand. Also, the paper segment competes with electronic data transmission, e-readers and electronic document storage alternatives. Increasing preference for these alternatives will continue to have an adverse effect on traditional print media and paper usage, and lower demand for communication papers. This remains a headwind for the Paper segment.

High Costs to Dent Margins

High demand for trucks due to low inventories, driver shortages and rail rate increases led to higher freight expenses in fourth-quarter 2020 and is anticipated to continue in the ongoing quarter as well. Labor costs will be higher with annual wage inflation and timing-related increases to fringes and benefits. Further, seasonally colder weather will lead to higher energy and wood costs. Prices for recycled fiber are also expected to trend higher.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>