PCA Packs A Growth Punch

4/28/2014


  Recent Price
$68
  Dividend
$1.60
  Yield
2.4%
  P/E Ratio
18
  Shares (millions)
98
  Long-Term Debt as % of Capital
66%
  52-Week Price Range
$75.10 - $42.64

Packaging Corp. of America ($68; PKG) shares have returned 9% this year, ahead of the median 3% decline for S&P 1500 Index paper-packaging stocks. A reasonable valuation and solid growth outlook give us confidence that the paper profits won't go up in smoke.

In October 2013, PCA spent $2.1 billion including debt to acquire Boise, boosting its presence in packaging and providing entry into the white-paper business. The acquisition expanded PCA's capacity for containerboard production 31% to 3.4 million tons.

PCA was generating strong operating results before the deal, with its mills running near full capacity. Both revenue and per-share profits rose by double digits in four consecutive quarters prior to the takeover, with both metrics posting at least 69% growth in each of the two quarters since the deal. Yielding 2.4%, PCA raised its quarterly dividend a total of 60% in two separate hikes in 2013. The stock is rated Buy.

Business breakdown

Based on production capacity, PCA is the fourth-largest U.S. maker of containerboard and the third-largest producer of white paper. For now, capacity expansions within the industry remain disciplined, offsetting any weakness in demand.

PCA's packaging business (about 75% of sales) makes corrugated products used as shipping containers for manufactured goods and food. It also makes colorful boxes and displays that house retail merchandise. This unit sells to 15,000 customers, none of which accounts for 10% of sales.

The lower-margin paper business (about 25% of sales) still uses the Boise Paper brand.  This unit makes commodity white paper used in offices as well as specialty products that feature different colors and coatings.

The paper unit's roughly 600 customers include paper merchants, printers, and envelope makers. None are more important than Office Max. PCA holds a contract to supply at least 80% of the retailer's commodity office paper through 2017.

Although PCA's contract survived Office Depot's ($4; ODP) acquisition of Office Max last November, Office Max can terminate the partnership early under a two-year phase-out period.  PCA's sales to both retailers accounted for 38% of its paper-unit sales in the December quarter.

In the March quarter, Packaging Corp. grew earnings per share 69% to $1.08 excluding special items, topping the consensus by $0.08. Excluding the Boise deal, PCA generated per-share-profit growth of 14%. Revenue jumped 90% to $1.43 billion. For the June quarter, PCA expects per-share profits of $1.10, up 55% but below the consensus of $1.14 at the time of the announcement. Management said planned annual maintenance at three of its mills will reduce production for the quarter.

Conclusion

At 18 times trailing earnings, PCA trades in line with its five-year average. Shares look more attractive relative to estimated 2014 earnings, with a forward P/E ratio of just 15, a 14% discount to their peer-group median.

An annual report for Packaging Corp. of America is available at 1955 West Field Court, Lake Forest, IL 60045; (847) 482-3000;
www.packagingcorp.com.

PACKAGING CORP. OF AMERICA
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '14
1.08
vs.
0.64
90%
75.10
-
61.35
23 - 19
Dec '13
1.04
vs.
0.61
72%
64.39
-
55.66
29 - 25
Sep '13
0.91
vs.
0.55
77%
61.32
-
48.45
31 - 25
Jun '13
0.71
vs.
0.49
12%
50.78
-
42.36
27 - 23
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
3.67
3.28
1.11
64.39
-
37.86
20 - 12
2012
2.84
2.06
1.20
38.67
-
24.82
19 - 12
2011
2.62
1.61
0.80
30.69
-
21.05
19 - 13
2010
2.44
1.62
0.60
27.08
-
20.00
17 - 12
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
93
70
95
52
73
69

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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