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Packaging Corp (PKG) Gains 17% YTD: What's Driving the Rally?

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Packaging Corporation of America’s (PKG - Free Report) shares have gained 17.5% so far this year, outperforming the industry’s growth of 2.4%. The Industrial Products sector and the Zacks S&P 500 composite have lost 15.2% and 13.3%, respectively, in the same time frame. PKG has a market capitalization of around $15 billion. The average volume of shares traded in the last three months was 369k.

Forecast-topping first-quarter 2022 results, upbeat guidance for the current quarter, and a dividend hike have contributed to its price performance. Packaging Corp is anticipated to benefit from the solid packaging demand and its efforts to capitalize on the same by investing in increasing capacity and acquisitions.

The Zacks Consensus Estimate for earnings for 2022 and 2023 has moved north by 2% and 1%, respectively, in the past 30 days, reflecting analysts’ optimism.
PKG currently has a Zacks Rank 1 (Strong Buy) and a VGM Score of A. This helps in identifying stocks with the most attractive value, growth and momentum.

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What’s Driving the Stock?

Packaging Corp’s revenues in the first quarter of 2022 were $2,136 million, which marked an 18% improvement year on year. Adjusted earnings per share skyrocketed 540% year on year to $2.72, aided by gains from higher volume, price and mix in the Packaging and Paper segments, improvement in operating cost, and favorable weather conditions. PKG has surpassed the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average surprise being 19.6%.

The company anticipates this momentum to sustain in the ongoing quarter and guided earnings per share at $2.83, higher than $2.17 reported in the second quarter of 2021. Its Packaging segment will benefit from the ongoing strength in demand. The previously announced price hikes across both segments are expected to negate the impact of the ongoing cost pressures.

Can PKG Retain the Momentum?

The Zacks Consensus Estimate for PKG’s 2022 earnings is pegged at $11.66, indicating a year-on-year increase of 24.2%. This is likely to be driven by the projected increase of 11.8% in revenues to $8.64 billion. The consensus mark for 2023 earnings stands at $12.23, suggesting growth of 5% year on year. Revenues for the year are expected to exhibit growth of 1.4% to $8.76 billion. The long-term earnings growth rate is currently pegged at 5%.

Packaging Corp will continue to benefit from strong packaging demand supported by the surge in e-commerce. Demand in its Packaging segment, which accounts for around 91% of the company’s revenues, continues to be robust, supported by elevated demand for meat, fruit and vegetables, processed food, beverages, medicine, and other consumer products. Both containerboard and corrugated product demand remain very strong across most of the company’s end markets.

Packaging Corp completed debt refinancing in October 2021, thereby extending its overall debt maturity from 8.5 years to 16.3 years. Thus, the move cut down 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. Its times interest earned ratio is currently at 9.3, higher than the industry’s 7.5. It maintains a balanced approach toward capital allocation to boost growth and maximize returns for shareholders. Its board of directors approved a $1 billion repurchase authorization in January 2022, followed by a 25% hike in quarterly cash dividend to $1.25 per share earlier this month. The company’s current dividend yield is 3.31%, higher than the industry’s 2.32%.

PKG has a five-year average dividend yield of 2.9%, a five-year dividend growth rate of 10.9%, and a five-year average payout ratio of 42.2%. The company outscores its peer, Sealed Air Corporation (SEE - Free Report) , which has a five-year average dividend yield of 1.5%, a five-year dividend growth rate of 4.4%, and a five-year average payout ratio of 22.9%.

SEE has increased its dividend once in the past five years, while PKG has rewarded its shareholders with dividend hikes twice in the same time frame.

Packaging Corp continues to build its containerboard portfolio through organic box volume growth and strategic box plant acquisitions. In December 2021, the company acquired all of the assets of Advanced Packaging Corporation in a cash-free transaction that will boost the company’s mill capacity and box plant operations. The conversion of the No. 3 paper machine at its Jackson, AL mill to linerboard in a phased manner over the next three years will help it meet the strong packaging demand.

Other Stocks to Consider

Some top-ranked stocks worth considering in the Industrial Products sector are Graphic Packaging Holding Company (GPK - Free Report) and Myers Industries (MYE - Free Report) . Both GPK and MYE flaunt a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

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 15.2% so far this 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 21% year-to-date.