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Packaging Corporation Hits 52-Week High on Acquisitions


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Shares of packaging products manufacturer Packaging Corporation of America (PKG - Analyst Report) scaled a new 52-week high of $82.88 on Oct 12, before closing the trading session a notch lower at $82.28 for a healthy year-to-date return of 19.7%. Barring minor hiccups, Waste Connections’ share prices have steadily been on an uptrend since late February.

Despite its strong price appreciation, this Zacks Rank #2 (Buy) stock has the wherewithal to continue its growth curve. The stock is currently trading at a forward P/E of 16.6x and has long-term earnings growth expectation of 11.5%.

Growth Drivers

Packaging Corporation recently entered into a definitive agreement to acquire Columbus Container, Inc., an independent corrugated products producer, for $100 million. The deal is likely to be closed by the fourth quarter of 2016.

Per the deal, Packaging Corporation will acquire the full-line corrugated products business located in Columbus, IN along with five warehousing facilities and other connected units located in Indiana and Illinois. The acquisition is expected to increase containerboard production by over 30,000 tons. The transaction is expected to be immediately accretive to earnings.

In August, Packaging Corporation made a similar deal with the purchase of all of the assets of TimBar Corporation, a large independent corrugated products producer, in a cash-free, debt-free transaction worth $386 million in cash. These strategic acquisitions show that the company is focused on increasing its vertical integration of containerboard to above 90%.The company expects both the strategic acquisitions to increase its containerboard integration and allow further optimization and enhancement of its mill capacity.

Packaging Corporation is the fourth largest containerboard and corrugated products producer in the U.S. Its products include a diversified range of corrugated products such as shipping containers, point-of-sale graphics packaging, point-of-purchase displays and other specialized packaging. An enormous scale of production and an extended product portfolio offer a competitive advantage to the company to fulfill the varied demands of its diverse clientele.

The company’s corrugated product manufacturing plants produce a wide variety of packaging products, including conventional shipping containers used to protect and transport manufactured goods, multi-colored boxes, and displays with strong visual appeal that aid merchandise the packaged product across retail locations. In addition, Packaging Corporation is a large producer of packaging for meat, fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products. The diverse product portfolio mitigates operating risks associated with any downturn in a particular product category.

Management further expects to increase shipment of containerboard and corrugated products. Paper prices are expected to move higher, reflecting continued realization of the announced price increases, while annual outage costs are expected to be lower. The company also expects a lower mix of corrugated products and higher prices for recycled fiber, electricity and fuels.

All these measures for a relatively healthy growth impetus for the near future probably raised investor confidence and drove the shares to a new 52-week high.

Other Stocks to Consider

Some other favorably ranked stocks in the industry include International Paper Company (IP - Analyst Report) , Neenah Paper, Inc. (NP - Snapshot Report) and UPM-Kymmene Oyj (UPMKY - Snapshot Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

International Paper has a long-term earnings growth expectation of 9.5% and is currently trading at a forward P/E of 13.0x. International Paper has a positive earnings surprise history with an average of 8.9% in the trailing four quarters, comprehensively beating estimates in each quarter.

Neenah has a long-term earnings growth expectation of 10% and is currently trading at a forward P/E of 17.9x. Neenah has a positive earnings surprise history with an average of 9.8% in the trailing four quarters, comprehensively beating estimates in each quarter.

UPM-Kymmene has a long-term earnings growth expectation of 5% and is currently trading at a forward P/E of 12.5x.

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