Packaging Corp. of America (NYSE: PKG) is BUY-rated with a target price is now $130, up from $110. We view Packaging Corp. We see room for further multiple expansion as earnings recover.
The beta on PKG is 1.13.
Excluding special items, adjusted net income fell to $1.57 per share from $1.92 per share. Third-quarter revenue was $1.7 billion. The operating margin was 12%, down from 15% in 3Q19.
Management is unable to provide guidance, due to the uncertainty caused by the COVID-19 pandemic. In the Paper segment, although demand is well below historical levels, as schools and business have re-opened to some extent, volume has improved since the low-point reached during the second quarter. The company also expects freight and scheduled maintenance outage costs to be higher and, with anticipated colder weather, energy costs should be higher as well.
EARNINGS & GROWTH ANALYSIS
Packaging Corp has two operating segments, Packaging (92% of sales) and Paper (8%).
In the Packaging segment, third-quarter EBITDA, excluding special items, fell to $324 million from $3.256 billion in 3Q19, while revenue increased to $1.50 billion from $1.49 billion. Corrugated product shipments rose 6.4%.
In the Paper segment, third-quarter EBITDA, excluding special items, came to $16.9 million, down from $57.7 million in 3Q19, and revenue fell to $178.1 million from $242.8 million. Volume fell by 55,000 tons from 3Q19, but improved 56,000 tons from 2Q20 low-point as schools and offices reopened.
Management noted that corrugated products demand has been strong so far this year, and expects this trend to continue.
Management keeps an eye on costs, though the adjusted operating margin in 3Q was 12%, down from 15% in 3Q19. Management is taking steps to reduce expenses, such as lowering operating costs. On April 27, PKG approved a plan for the closure of a corrugated products plant in San Lorenzo, California. About 20% of the business associated with this facility will be absorbed by other PKG plants.
FINANCIAL STRENGTH & DIVIDEND
The company ended 3Q with $853 million of cash and debt of $2.5 billion.
PKG pays a dividend. In May 2018, PKG raised its quarterly dividend by 20% to $0.79, or $3.16 annually. It previously raised the payout by 15% in September 2016 and by 38% in February 2015. We think the dividend is secure, but unlikely to grow during the pandemic.
MANAGEMENT & RISKS
Mark W. Kowlzan has served as the company’s CEO since July 2010 and as chairman since 2016. From 1998 through June 2010, Mr. Kowlzan managed the company’s containerboard mill system, first as vice president and general manager and then as senior vice president – Containerboard. Robert Mundy is the chief financial officer. Mr. Mundy was previously senior VP and CFO at Verso Corp. Before that, he worked for more than 20 years at International Paper.
Investors in PKG shares face risks. PKG requires a healthy global economy to sustain price increases and drive revenue growth. Given the uncertain duration of the pandemic, the company has not provided forward guidance. Other risk factors include industry overcapacity and unexpected plant outages. The company’s performance is also dependent on its ability to set pricing in the containerboard and box segments. On the other hand, it must accept market prices for the wood fiber, energy, and chemicals used in the production process.
The price/book multiple is 3.0 but below the five-year average of 4.0. We see room for further multiple expansion as earnings recover.