Key points
- Packaging Corporation of America reported a solid quarter, but provided tepid guidance that sent shares lower to the buy zone.
- The move realigned the market with analyst sentiment and the consensus target, leaving the uptrend intact.
- A turning point is expected by the end of the year that will bring earnings growth back into play for this stock.
- 5 stocks we like best from Packaging Co. of America
Packaging Corporation of America New York Stock Exchange: PKG had a solid quarter but provided tepid guidance, sending shares down 4%. The move is ugly at first glance, but, as they say, it’s in the eye of the beholder. Investors might view the drop as a loss, a time to sell, or a reason to stay out of the market, but that would be a mistake. Packaging Corporation of America is a solid company with ample liquidity and capital returns that is experiencing a market recovery, not a meltdown.
Guidance is tepid but probably the lowest point in turnaround history. Underlying metrics in the first quarter show demand supporting businesses, prices rising and inventories low to support them. Revenue growth is back on the scene now; the forecast is for earnings growth to return by the end of the year, but it may take longer than previously hoped for this industrial stock.
Packaging Corporation of America exceeds solid demand
Packaging Co. of America
(As of 04/24/2024 ET)
- 52 week interval
- $122.20
▼
$191.27
- Dividend yield
- 2.87%
- P/E ratio
- 9.74pm
- Price target
- $173.86
Packaging Corporation of America reported a solid quarter in the first quarter of 2024, producing revenues of $1.98 billion. The top line is flat compared to last year, but 360 basis points are above the consensus reported by Marketbeat due to demand in both operating segments. Volume and mix were offset by lower prices, which are down from last year but are now strengthening. Packaging saw an 11% increase in comparable daily shipments and is expected to remain strong. Paper volume is also increasing and is expected to be strong.
Margin news is mixed. The company reported adjusted earnings of $1.72, a decrease of $0.48 from last year. The decline was due to lower pricing and mix, a longer-than-expected outage, higher expenses and increased depreciation. $1.72 is above consensus, but outperformance is weak given revenue strength, and margin weakness is expected to persist into the second quarter.
Driving is the same mix. The company did not provide final figures, but expects volume demand to remain strong and pricing to solidify. However, a planned outage will impact volume and other issues exist. Higher transportation and tax costs will impact EPS, resulting in a lower-than-expected result. Offsetting factors are that the impact of the outage will be short-lived and the $2.07 in expected earnings is enough to support the dividend and balance sheet health until earnings growth resumes.
The PKG market moves to realign with analyst sentiment
Analyst sentiment helped push PKG stock prices to March and April highs, but the market got ahead of the trend, preparing for a correction. The share price has now corrected to the consensus target, up 30% over the last twelve months and is unlikely to fall now. Sentiment is between Hold and Reduce and will likely trend upward in the coming quarters. The company results are mediocre, but the turning point is within reach. Revenue growth is expected to continue and then accelerate in 2025, followed by earnings growth. Institutional activity was also bullish; expect that group to buy on the dip.
The technical action following the release is favorable for long-term investors. The market is down but showing solid support at the 150-day moving average, in line with the uptrend. PKG stock prices may not recover significantly anytime soon, but a deeper decline is not expected. The critical support level is near $170 and is unlikely to be surpassed without another change in the outlook; the market sold off and capitulated after a momentum-driven rally and realigned with sentiment.
Packaging Corporation of America offers relatively high yield and trading value at these levels. The stock pays $5.00 per share after several aggressive dividend increases and yields 2.9% today. The yield is reliable and represents 60% of this year’s earnings reduction outlook and 50% of next year’s, so it is sustainable if not growing. PKG has a history of increasing its distribution but failed to increase its payout last year and may not do so this year.
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