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Packaging Corp. (PKG) Up 2% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Packaging Corp. (PKG - Free Report) . Shares have added about 2% in that time frame, underperforming the S&P 500.

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

Packaging Corp Q3 Earnings Beat Estimates, Sales Miss

Packaging Corp reported adjusted earnings per share of $1.92 in third-quarter 2019, which surpassed the Zacks Consensus Estimate of $1.90. Earnings came in ahead of management’s guidance of $1.91 per share. However, the reported figure declined 14% year over year.

The decline can be attributed to higher operating and converting costs and lower volume in the Paper and Packaging segments. However, these were partly offset by higher prices and mix in the Paper segment, lower annual outage expenses and lower freight and logistics expenses.

Including one-time items, earnings in the reported quarter was $1.89 compared with $2.18 in the prior-year quarter.

Operational Update

Sales for the third-quarter went down 3% to $1.75 billion from the prior-year quarter’s $1.8.1 billion. The reported figure also lagged the Zacks Consensus Estimate of $1.77 billion.

Cost of products sold declined 2% year over year to $1.34 billion in the reported quarter. Gross profit went down 7% to $411 million from the $443 million witnessed in the prior-year quarter. Selling, general and administrative expenses rose 2% to $137 million from the $134 million incurred in the year-ago quarter.

Segmental Performance

Packaging: Sales in this segment went down to $1,490 million from $1,535 million in the year-earlier period. Segmental income, excluding special items, came in at $238 million for the reported quarter compared with $290 million witnessed in the comparable period last year.

Printing Papers: This segment’s revenues declined 5% year over year to $243 million in the quarter thanks  to discontinuation of the paper business in the Wallula Mill. Segmental income, excluding special items, improved to $48 million from the $33 million reported in the year-earlier period.

Cash Position

At the end of the third quarter, the company had a cash balance of $738.3 million compared with $293.8 million recorded at the end of the prior-year quarter.

Outlook

For the fourth quarter, for the Packaging segment the company expects slightly lower prices, a seasonally less rich mix in corrugated products and slightly lower shipments with one less shipping day. Containerboard sales volume is also anticipated to be lower as the company intends to build some inventory prior to year-end in preparation for first-quarter 2020 scheduled maintenance outages at its three largest containerboard mills.

For the Paper segment, volumes are anticipated to be seasonally weaker along with lower average prices. Due to cold weather, energy costs are likely to be higher for the ongoing quarter. Other operating and converting costs are likely to be higher as well, which includes the costs associated with the start-up of the new Richland, WA box plant during the reported quarter. Scheduled maintenance outage costs are anticipated to be higher sequentially. Considering these, the company envisions fourth-quarter earnings at $1.70 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Packaging Corp. has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Outlook

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


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