Packaging Corporation of America – PKG

PKG is one of the largest producers of containerboard and corrugated packaging in the United States and the third largest producer of uncoated freesheet in North America, based on production capacity. 

The company offers the following:

• Corrugated Containers
• Retail Packaging and Displays
• Produce Packaging
• E-Commerce Packing Solutions
• Container board
• Boise Paper 

(Source: Packaging Corporation of America).

https://ir.packagingcorp.com

In 2020, PCA produced about 4.3 million tons of containerboard and shipped about 62.8 billion square feet (BSF) of corrugated products and PCA’s Paper segment operates under the trade name Boise Paper. 

Some metrics I look for – 

Safety:

Dividend Safety Score – 63 out of 99 – considered “safe”

Current Ratio (look for a number higher than 1, higher the better) – 2.30

Debt to Equity (lower the better) – 0.88

Payout Ratio – 48.10%

Estimated Earnings Growth Rate – 5 year – 16.40%

Dividend history: 

Years of dividend increases: 12

Dividend growth rate – 5 year – 11.13%

Current yield: 2.88%

Current dividend: $4.00

Valuation: 

DCF model:  $192.70

P/E Mean Reversion: $132.51

Dividend Yield Theory: $145.99

Average of the three valuations – $157.06

Since the DCF model is out of alignment with the other methods, ,the average of the other two is – $139.25

Analyst Consensus Estimate (1 Year) – $142.67

Current price: $139.07(01/05/2022)

Potential discount – the stock is trading at fair value to slightly undervalued depending on the metric used.  The stock is between 0-11% undervalued

Commentary:

Want to bet on the continued boom in e-commerce?  Do you get as many Amazon and Target boxes at your door as I do?  If so, PKG might be an attractive play on this growing industry.  PKG is a $13 billion market cap industrial company that has been around since 1959.  They supply boxes, cardboard supplies, paper products, and retail displays for dozens of Fortune 500 companies.  

There are three segments that are appealing to me.  Cardboard boxes and shipping supplies – with the continued rise of e-commerce, boxes will be in ever stronger demand going forward; Retail Displays – any time you go into the retail store and see a big display advertising a new product or at the grocery store advertising a brand like pepsi or Frito-Lays, a good chance the display material is from PKG; and lastly Boise Paper – I have used Boise paper at my workplace but never realized it was owned by PKG.  These three segments give a wide diversity of revenue and future opportunities.

The company has fantastic financials, with low debt to equity, low current ratio, meaning it has ample funds to pay for short term liabilities, an amazing Five Year Average Return on Invested Capital (ROIC) of 16%, and a reasonable dividend payout ratio.  The dividend has been rising for 12 years and over the past five years has increased an average of over 11%.  Combine the current yield of almost 3% and growth of 11%, this company provides a compelling case for dividend investors. 

Revenue and profit has been flat for this company over the past 5 years but analysts are expecting 16% annual growth over the next 5 years. The valuation is currently priced at value or slightly undervalued, but in the market we are in with high P/E ratios, this may be seen as a bargain way to get exposure to both the industrial sector and a play on e-commerce.

Let me know what you think!

Disclosure: I do not own PKG.