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Why Is Packaging Corporation (PKG) Up 7.7% Since Its Last Earnings Report?

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A month has gone by since the last earnings report for Packaging Corporation of America (PKG - Free Report) . Shares have added about 7.7% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is PKG due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Packaging Corporation Beats on Q1 Earnings & Revenues

Packaging Corporation reported first-quarter 2018 adjusted earnings of $1.55 per share, which climbed 22% year over year. Earnings per share came in above management’s guidance of $1.52, as well as beat the Zacks Consensus Estimate of $1.53.

Including one-time items, earnings came in at $1.48 per share compared with $1.24 per share reported in the year-ago quarter.

Operational Update

Net sales for the quarter came in at $1.69 billion, up 10% from the $1.54 billion recorded in the year-ago quarter. The reported figure also beat the Zacks Consensus Estimate of $1.63 billion.

Cost of products sold rose 11.4% year over year to $1.33 billion in the quarter. Gross profit jumped 5% to $356 million from $338 million witnessed in the prior-year quarter. Gross margin contracted 100 basis points (bps) year over year to 21% in the quarter. Selling, general and administrative expenses escalated 5.6% to $135 million from $128 million incurred in the year-ago quarter. Operating income advanced 4.7% year over year to $213 million.

Segment Performance

Packaging: Sales from this segment went up to $1.4 billion from $1.3 billion reported in the prior-year period. Segment EBITDA, excluding special items, came in at $308 million in the first quarter compared with $274 million in the year-earlier quarter. Containerboard production totaled 953,000 tons, while containerboard inventory was up 31,000 tons compared to first-quarter 2017.

Printing Papers: Sales from this segment came in at $269 million in the reported quarter, up from $259 million witnessed in the year-earlier quarter. Segment EBITDA, excluding special items, for the quarter declined to $31 million from $42 million reported in the year-earlier period.

Cash Position

At the end of the first quarter, the company had cash balance of $102 million compared with $254 million witnessed at the end of the prior-year quarter.

Outlook

Packaging Corporation expects demand in Packaging segment to remain strong in second-quarter 2018, resulting in higher corrugated products and containerboard shipments. The company will continue to implement the previously-announced Packaging segment price increases. In the Paper segment, it expects volumes to be lower due to conversion of the No. 3 machine at the company’s Wallula Mill from paper to linerboard. The segment will benefit from paper price hike.

The company projects that recycled fiber prices will remain slightly lower. Packaging Corporation will also gain from lower maintenance outage costs and a lower tax rate.

However, prevalent price inflation in chemical and freight costs, and incremental wage pressure remain headwinds. Considering these, the company has guided earnings per share of $1.96 for the second quarter.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter compared to one lower.

VGM Scores

At this time, PKG has a great Growth Score of A, though it is lagging a bit on the momentum front with a B. The stock was also allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value and growth investors while momentum investors may want to look elsewhere.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, PKG has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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