Should You Wait to Buy Packaging Corporation of America?

Key Points

• Packaging Corporation of America stock surges on mixed results. 
• Margin contracted but not as much as expected, and volume should improve. 
• Analysts see the stock trading 18% lower, so the price may be capped. 

Packaging Corporation of America NYSE: PKG issued a mixed Q2 report, but details within it catalyzed a substantial increase in share price. The details include a better-than-expected margin and an outlook for demand improvement that could sustain through the end of the year. The caveat is that lower prices for finished products will cut into the bottom line, and there isn't much else to sustain the rally. 

Packaging Corporation of America stock is a high-yielding name trading at a relative value, but the market has gotten ahead of itself. If the analysts are any guide, the market is due for a pullback in the action that will present a much better buying opportunity in the days and weeks ahead. 

The analysts present a significant headwind for the market. Their consensus has slipped to "reduce" from "hold" over the past year, and the price target is falling. The MarketBeat.com consensus price target is down to $125 from last year's $158, making it one of the site's lowest-rated stocks. If that doesn't change, there is little chance the market will move higher without another catalyst, but there is an opportunity. The analysts may begin to reverse themselves; if there is a shift in the sentiment, it will produce a tailwind for the market. 

Packaging Corporation of America Surges on Mixed Results 

Packaging Corporation of America had a mixed quarter, with earnings coming in better than expected. The company reported $1.95 billion in net income, a decline of 12% compared to last year, which outpaced the MarketBeat.com consensus. The miss drove a contraction in volume that price and mix only partially offset. Packaging sales fell 13% while paper fell 4%, indicating softness in the broader economy.

The company's margin contracted at the gross and operational levels but less than expected. The gross margin contracted more than 300 basis points but cost-cutting initiatives and spending controls offset these at the operational level. The takeaway is that adjusted earnings of $2.31 beat the consensus by $0.38 but are down nearly 33% YOY. This weakness should not end soon, and guidance reflects it. Management guided for $1.88 in earnings for Q3, which is down sequentially compared to last year and possibly optimistic, given the decline in volume. 

Packaging Corporation of America Capital Returns Will Continue

Packaging Corporation of America is a solid dividend-paying stock with a yield near 3.6%, with shares trading near $153. The payout is about 50% of the earnings outlook, not counting the Q2 outperformance. The company doesn't have a consistent history of distribution increases but tends to increase every few years or so and has only increased since 2009. The company made no share repurchases this year in Q2 but may resume them anytime. 

The institutional activity is mixed but bullish on balance. The institutions own more than 90% of the stock, and buying has outpaced selling in 2023. This activity is consistent with a recent floor in share prices which may provide support should the stock correct. 

The share price surged about 10% following the Q2 release. The move has the stock moving up from the middle of a range and quickly approaching potential resistance. It will likely correct to a lower price if the market can't get above the $155 level. Even if the market gets above $155, there is a risk of a correction due to the analysts' low targets.