Yahoo Finance Packaging Corp (PKG) Declines 20% in a Year: Will It Recover?
Shares of Packaging Corporation of America PKG have lost 20.4% in a year compared with the industry’s fall of 12.6%, reflecting the ongoing weakness in volume in the Paper segment. Elevated costs are also denting the company’s margins.
Weak Packaging Demand & Low Paper Volumes Ail PKG
Global and domestic economic conditions continue to be challenging, with ongoing inflationary pressures, high interest rates and persisting supply-chain disruptions creating headwinds. Customers are working to lower their high inventory levels, impacting the order flow and demand for Packaging Corporation’s products. Containerboard production is anticipated to be lower in the upcoming quarters, and the company plans to match production with demand.
The company anticipates lower prices in the Packaging segment in the second quarter of 2023 as a result of the recent decreases in the published domestic containerboard prices and lower export prices. In the Paper segment, the company will continue implementing the price increase that took effect in September 2022, with a fairly flat sales volume.
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Cost Headwinds Hurt Results
Labor costs and certain indirect costs are expected to be elevated in the upcoming quarters. Inflated prices for many chemicals, particularly starch and caustic soda, remain headwinds. This will be somewhat offset by lower wood and recycled fiber prices, energy prices, and reduced scheduled maintenance outage expenses. High interest and non-operating pension expenses and a higher tax rate are expected to hurt margins.
Packaging Corp has a market capitalization of around $11 billion. It currently carries a Zacks Rank #4 (Sell). Let’s discuss the factors that indicate that the stock may stage a comeback despite the near-term headwinds.
Solid E-commerce Growth to Buoy Packaging Demand
Despite the current weakness, Packaging Corp stands to gain from strong growth in e-commerce activities that will continue to support demand for its packaging solutions.
The Packaging segment accounts for around 91% of the company’s revenues. Also, packaging products are essential for distributing food, beverage and pharmaceutical products. The Packaging segment will continue to be supported by stable packaging demand for meat, fruit and vegetables, processed food, beverages, medicine, and other consumer products.
Although demand in the Packaging segment fell short of the company's initial expectations in the first quarter of 2023, Packaging Corp was able to offset the negative impacts through outstanding cost-management and process-optimization efforts at its mills and corrugated product plants. Despite the weak demand, PKG continues to perform above pre-COVID levels. In spite of one fewer shipping day in the second quarter of 2023, the company anticipates increased volume for the Packaging segment.
Low Debt Levels & Acquisitions to Aid Growth
The company completed debt refinancing in October 2021, which extended its overall debt maturity from 8.5 years to 16.3 years, and lowered its overall interest rate from 3.9% to 3.5%. As of Mar 31, 2023, the company’s total debt to total capital ratio stood at 0.40, much lower than the industry’s 0.63.
In December 2021, the company acquired all assets of the United States-based packaging solutions company, Advanced Packaging Corporation, in a cash-free transaction. The company acquired a full-line 500,000-square-foot corrugated products facility in Grand Rapids, MI. The deal supports Packaging Corp’s focus on enhancing its containerboard portfolio through organic box volume growth and strategic box plant acquisitions.
Following the buyout, the company’s containerboard integration increased almost 80,000 tons. This will also boost its mill capacity and box plant operations. The deal is expected to be accretive to earnings.
Stocks to Consider
Some better-ranked stocks from the Industrial Products sector are Worthington Industries, Inc. WOR, The Manitowoc Company, Inc. MTW and Pentair plc PNR. WOR and MTW flaunt a Zacks Rank #1 (Strong Buy) at present, and PNR has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Worthington Industries has an average trailing four-quarter earnings surprise of 27.5%. The Zacks Consensus Estimate for WOR’s fiscal 2023 earnings is pegged at $4.93 per share. The consensus estimate for 2023 earnings has moved north by 17.7% in the past 60 days. Its shares gained 26.9% in the last year.
Manitowoc has an average trailing four-quarter earnings surprise of 38.8%. The Zacks Consensus Estimate for MTW’s 2023 earnings is pegged at 85 cents per share. The consensus estimate for 2023 earnings has moved 63.5% north in the past 60 days. MTW’s shares gained 18.6% in the last year.
The Zacks Consensus Estimate for Pentair’s 2023 earnings per share is pegged at $3.66, up 3% in the past 60 days. It has a trailing four-quarter average earnings surprise of 7.2%. PNR gained 14.9% in the last year.
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The Manitowoc Company, Inc. (MTW) : Free Stock Analysis Report
Worthington Industries, Inc. (WOR) : Free Stock Analysis Report
Packaging Corporation of America (PKG) : Free Stock Analysis Report
Pentair plc (PNR) : Free Stock Analysis Report