High Demand A Good Problem For Packaging Corporation Of America

Packaging Corporation Of American Widens Margins 

Packaging Corporation of America NYSE: PKG is not immune to the effects of the global supply chain disruptions but it is navigating the environment well. The company reported significant hurdles to revenue and earnings in the form of freight availability and cost, labor costs, and input costs but was able to more than make up the difference. The good news is that, while price increases share some of the credit, the company’s work to expand production to meet demand is as much to blame for the success. Management says record volume and mix contributed to the pricing increases enough to improve margins by several hundred basis points. 

Packaging Corporation of America Results Beat On All Metrics 

Packaging Corporation of America had a great quarter and one, that if it was impeded by the pandemic, shows little signs of the headwinds facing American businesses today. The company reported a little more than $2.0 billion in net revenue good for a gain of 18.3% over last year. The revenue was driven by strength in the containerboard segments (read eCommerce) and offset by weakness in the paper segment. More importantly, revenue is up 14.25% over the 2019 time frame and beat the Marketbeat.com consensus by 360 basis points, no small feat in today’s environment. 

Moving down to the margins, pricing actions and mix contributed to a 520 basis point improvement in gross margin and a 530 basis point improvement in operating margin. This left GAAP earnings at $2.63 or $0.30 ahead of the consensus and nearly $0.70 better than last year. At the adjusted level, earnings of $2.69 are even better. Adjusted earnings are up more than 70% YOY and beat the consensus by $0.35 and should continue to remain strong over the next few quarters. The company is forecasting not only a strong pricing environment but high demand as well. As for guidance, the company is expecting $2.04 in adjusted EPS versus the Marketbeat.com consensus of $2.07. 

“Looking ahead as we move from the third and into the fourth quarter, we will continue to implement our previously announced price increases for domestic containerboard, corrugated packaging, and paper, and we also expect average export containerboard prices to move higher,” says CEO Mark W. Kowlzan. 

Packaging Corporation Of America Could Be Raising The Dividend 

Packaging Corporation of America pays a safe and possibly growing 2.99% yield while trading at a discount to the broad market. The stock is trading about 16X its earnings consensus, a consensus that is too low, with upside risk in the guidance and a strong balance sheet to boot. The company is paying out about 50% of earnings with ample free cash flow and a history of dividend increases as well. The company’s last increase was exactly four quarters ago so it looks like one could be coming any day. Based on our assessment of the numbers, the next increase could be worth 10% or more. 

The Technical Outlook: Range-Bound PKG Could Move Lower 

Shares of Packaging Corporation of America have been range-bound over the past few months and could remain so in the near term at least. Price action moved up in the wake of the earnings report but is struggling with resistance in early trading. If price action can not follow through on the early gains we see it languishing near the recent lows until another catalyst emerges. If price action fails to maintain support at this level a move down to $128 or even $120 is very possible.