Back to top

Image: Bigstock

Reasons to Add Packaging Corp (PKG) Stock to Your Portfolio Now

Read MoreHide Full Article

Packaging Corporation of America (PKG - Free Report) is well-poised to gain on the solid packaging demand backed by e-commerce and higher requirements for meat, fruit and vegetables, processed food, beverages, medicine and other consumer products. Its focus on acquisitions to expand containerboard and corrugated products portfolio and price-hike actions are likely to favor 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 complete list of today’s Zacks #1 Rank stocks here.

Upbeat Outlook: Packaging Corp projects earnings per share (EPS) to be around $2.83 in second-quarter 2022. The guidance indicates year-over-year growth of 30%. Its Packaging segment will benefit from the ongoing strength in demand. It will continue to implement previously announced price hikes across both segments, which will help in negating the impact of cost inflation.

Strong Financial Position: The company completed debt refinancing in October 2021 that extended its overall debt maturity 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 at 0.40 as of Mar 31, 2022, lower than the industry’s 0.63. The company’s times interest earned ratio has been improving over the past few years and currently is at 9.3, higher than the industry’s 7.5. The company maintains a balanced approach toward capital allocation in order to boost growth and maximize returns for shareholders. The company’s board of directors approved a $1-billion repurchase authorization in January 2022. In the first quarter, the company paid out $93.6 million as dividends to shareholders.

Positive Growth Expectations: The Zacks Consensus Estimate for the company’s current-year EPS is currently pegged at $11.66, indicating year-over-year growth of 24.2%. The same for 2023 stands at $12.23, suggesting a year-over-year improvement of 5%.

Positive Earnings Surprise History: Packaging Corp has a trailing four-quarter earnings surprise 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 is generating earnings by effectively managing assets.

Growth Drivers in Place

Demand in the Packaging segment, which accounts for 91% of the company’s revenues, continues to be strong. 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.

Demand for containerboard and corrugated products remains strong across most of the company’s end markets. Apart from this, Packaging Corp will continue to benefit from the e-commerce boom that has led to an increase in demand for boxes.

Packaging Corp completed the planned maintenance outage at the Jackson mill during the third quarter of 2021. The mill restarted number 1 machine and began producing uncoated freesheet grades. This machine will help meet customers’ strong demand for box plant and maintain targeted inventory levels. Also, the mill’s number 3 machine produces linerboard in order to meet strong packaging demand and maintain appropriate inventory levels in the packaging segment. In February 2021, the company announced the discontinuation of production of uncoated freesheet (UFS) paper grades on the machine and its plans to permanently convert the machine to produce linerboard in a phased approach over the next three years. This move will provide much needed internal linerboard supply and will enable the company to optimize and enhance current mill capacity and box plant operations

In December 2021, Packaging Corp acquired all of the assets of Advanced Packaging Corporation in a cash-free transaction. The deal supports Packaging Corp’s focus on enhancing its containerboard portfolio through organic box volume growth and strategic box plant acquisitions. The company’s containerboard integration is anticipated to increase by almost 80,000 tons. This will boost mill capacity and box plant operations. The deal is expected to be accretive to earnings this year.

Price Performance

Zacks Investment Research
Image Source: Zacks Investment Research

Packaging Corp’s stock has gained 0.2% in the past year against the industry’s decline of 4.9%.

Other Stocks to Consider

Some other top-ranked stocks in the Industrial Products sector are Graphic Packaging Holding Company (GPK - Free Report) , Myers Industries (MYE - Free Report) and Avery Dennison Corporation (AVY - Free Report) .  While GPK and MYE flaunt a Zacks Rank #1, AVY carries a Zacks Rank #2.

Graphic Packaging has an estimated earnings growth rate of 86.8% for the current year. In the past 60 days, the Zacks Consensus Estimate for current-year earnings has been revised upward by 7.6%.

Graphic Packaging pulled off a trailing four-quarter earnings surprise of 7.2%, on average. The company’s shares have appreciated 14.8% in a year.

Myers Industries has an expected earnings growth rate of 67% for 2022. The Zacks Consensus Estimate for the current year’s earnings has moved up 27% in the past 60 days.

MYE has a trailing four-quarter earnings surprise of 20.1%, on average. Myers Industries’ shares have gained 13% in the past year.

Avery Dennison has a projected earnings growth rate of 8.9% for the current year. The Zacks Consensus Estimate for 2022 earnings has moved north by 0.8% in the past 60 days.

Avery Dennison delivered a trailing four-quarter earnings surprise of 5.3%, on average. AVY has long term earnings growth rate of 7%.