Packaging Corporation of America (PKG - Free Report) is poised well to gain from strong demand for packaging for food, beverage and pharmaceutical products in the wake of the coronavirus crisis. Further, the e-commerce boom and a strong balance sheet will drive growth.
The stock has long-term expected earnings per share growth rate of 5%. At present, Packaging Corporation carries a Zacks Rank #3 (Hold). It has 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 (Buy) or 3, offer the best investment opportunities for investors. You can see the complete list of today's Zacks #1 Rank stocks here.
In the past year, the stock has gained 3% against the industry’s decline of 38.1%.
Let’s delve deeper into the factors that substantiate the company’s Zacks Rank #3.
Q1 Results Beat: Packaging Corporation reported adjusted earnings per share of $1.50 in first-quarter 2020, surpassing the Zacks Consensus Estimate of $1.20. Earnings also came in ahead of management’s guidance of $1.20 per share.
Positive Earnings Surprise History: The company’s earnings have outpaced the Zacks Consensus Estimate in two of the last four quarters, while the same were in line in the other two. The company has a trailing four-quarter positive earnings surprise of 4.55%, on average.
Return on Assets: Packaging Corporation currently has a Return on Assets (ROA) of nearly 9%, while the industry recorded ROA of 5%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.
Growth Drivers: Packaging products are essential for the distribution of food, beverage and pharmaceutical products. Hence, the segment will continue to benefit from the elevated demand for meat, fruit and vegetables, processed food, beverages, medicine, and other consumer products owing to the coronavirus crisis.
Notably, demand in the Packaging segment, which contributes around 85% of the company’s revenues, was robust in first-quarter 2020. The company reported record first-quarter volume in the container board mills even while performing scheduled annual maintenance outage work at four of its mills. Further, Packaging Corporation will benefit from the e-commerce boom that will lead to increase in demand in boxes.
Over the past five years, Packaging Corporation’s debt has witnessed a CAGR of 2% while its cash flow has seen a CAGR of 44% over the same time frame. With the refinancing completed in fourth-quarter 2019, the company currently does not have any debt maturities for the next 3 years. The total debt to total capital ratio was at 0.47 as of Mar 31, 2020, lower than the industry’s 0.61. Further, the company’s times interest earned ratio of 7.9 is much higher than the industry’s 4.1.
Packaging Corporation's ended first-quarter 2020 with $764 million of cash on hand or $913 million, including the cash recently moved to marketable securities. The company’s liquidity as of Mar 31, 2020 of over $1.2 billion is the highest ever for the company. This positions the company well to navigate through the turbulent times.
However, there are a few factors that are likely to hinder growth in the near term.
The paper segment competes with electronic data transmission, e-readers, electronic document storage alternatives. Increasing preference for these alternatives will continue to have an adverse effect on traditional print media and paper usage and lower demand for communication papers. This will impact the Paper segment’s performance going forward. On top of this, the coronavirus outbreak has affected paper consumption in schools, offices and businesses, further straining paper demand.
Other Stocks to Consider
Some better-ranked stocks in the Industrial Products sector are Silgan Holdings Inc. (SLGN - Free Report) , Ampco-Pittsburgh Corporation (AP - Free Report) and Energous Corporation (WATT - Free Report) . While Silgan sports a Zacks Rank #1 (Strong Buy), Ampco-Pittsburgh and Energous carry a Zacks Rank of 2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Silgan has a projected earnings growth rate of 11.3% for 2020. The company’s shares have gained 6% in the past three months.
Ampco-Pittsburgh has an expected earnings growth rate of 2.70% for the current year. The stock has appreciated 4% over the past three months.
Energous has an estimated earnings growth rate of 17.3% for the ongoing year. The company’s shares have rallied 17% in three months’ time.
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