Packaging Corp (PKG) Gains 17% YTD: What’s Driving the Rally?

Packing Company of AmericaPKG shares have gained 17.5% so far this year, beating the sector’s 2.4% growth. The industrials sector and the Zacks S&P 500 composite lost 15.2% and 13.3%, respectively, over the same period. PKG has a market capitalization of around $15 billion. The average volume of shares traded over the past three months was 369,000.

Better-than-expected results for the first quarter of 2022, an optimistic forecast for the current quarter and a rise in dividends contributed to its price performance. Packaging Corp should benefit from the demand for solid packaging and its efforts to capitalize on it by investing in increased capacity and acquisitions.

The Zacks consensus estimate for earnings for 2022 and 2023 has moved north by 2% and 1%, respectively, over the past 30 days, reflecting analyst optimism.

PKG currently has a Zacks Rank 1 (Strong Buy) and a VGM Score of A. This helps identify stocks with the most attractive value, growth and momentum.

Image source: Zacks Investment Research

What is driving the stock?

Packaging Corp’s revenue in the first quarter of 2022 was $2,136 million, representing an 18% year-over-year improvement. Adjusted earnings per share soared 540% year-on-year to $2.72, helped by gains from higher volume, price and mix in packaging segments and paper, improved operating costs and favorable weather conditions. PKG has exceeded the Zacks consensus estimate for earnings in each of the past four quarters, with the average surprise being 19.6%.

The company expects this momentum to continue in the current quarter and has guided earnings per share to $2.83, higher than the $2.17 reported in the second quarter of 2021. Its Packaging segment will benefit from the continued strength of the request. Previously announced price increases in both segments are expected to offset the impact of continued cost pressures.

Can PKG maintain momentum?

The Zacks consensus estimate for PKG revenue in 2022 is pegged at $11.66, indicating a 24.2% year-over-year increase. This is likely due to the projected 11.8% increase in revenue to $8.64 billion. The consensus rating for 2023 earnings stands at $12.23, suggesting 5% year-over-year growth. Revenue for the year is expected to grow 1.4% to $8.76 billion. The long-term earnings growth rate is currently set at 5%.

Packaging Corp will continue to benefit from strong demand for packaging supported by the rise of e-commerce. Demand in its Packaging segment, which accounts for approximately 91% of the company’s revenue, remains robust, supported by high demand for meat, fruits and vegetables, processed foods, beverages, medicines and other products of consumption. Demand for corrugated and corrugated board products remains very strong in most of the company’s end markets.

Packaging Corp completed the refinancing of its debt in October 2021, thus extending the overall maturity of its debt from 8.5 years to 16.3 years. Thus, the move reduced its overall interest rate from 3.9% to 3.5%. PKG’s total debt to total capital ratio was 0.40 as of March 31, 2022, below the industry’s 0.63. Its ratio multiplied by interest earned is currently 9.3, higher than the industry’s 7.5. It maintains a balanced approach to capital allocation to drive growth and maximize shareholder returns. Its board of directors approved a $1 billion buyout authorization in January 2022, followed by a 25% hike in the quarterly cash dividend to $1.25 per share at the start of the month. The company’s current dividend yield is 3.31%, higher than the industry’s 2.32%.

PKG has a five-year average dividend yield of 2.9%, a five-year dividend growth rate of 10.9% and a five-year average payout ratio of 42.2%. The company outperforms its peers, Airline Sealed SEE, which has a five-year average dividend yield of 1.5%, a five-year dividend growth rate of 4.4% and a five-year average payout ratio of 22.9%.

SEE has increased its dividend once in the past five years, while PKG has rewarded its shareholders with dividend hikes twice in the same time frame.

Packaging Corp continues to grow its packaging board portfolio through organic box volume growth and strategic box mill acquisitions. In December 2021, the company acquired all of the assets of Advanced Packaging Corporation in a cashless transaction that will expand the company’s plant capacity and box plant operations. The gradual conversion of the No. 3 paper machine at its Jackson, AL mill to linerboard over the next three years will help it meet strong packaging demand.

Other actions to consider

Some top-ranked stocks to consider in the industrials sector are Graphic packaging holding company GPK and Myers Industries ME. Both GPK and MYE boast a #1 Zacks rank. You can see the full list of today’s Zacks #1 Rank stocks here.

Graphic Packaging has an estimated profit growth rate of 86.8% for the current year. Over the past 60 days, the Zacks consensus estimate for current-year earnings has been revised up 7.6%.

Graphic Packaging has realized an earnings surprise for the last four quarters of 7.2% on average. Shares of the company have appreciated 15.2% so far this year.

Myers Industries forecasts a 67% earnings growth rate for 2022. Zacks’ consensus estimate for current-year earnings is up 27% in the last 60 days.

MYE has a last four quarter earnings surprise of 20.1% on average. Shares of Myers Industries have gained 21% since the start of the year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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