PKG Stock Study (6-12-23)

I recently did a stock study on Packaging Corp. of America. (PKG) with a closing price of $130.80. My original study is here.

M* writes:

     > Packaging Corp of America is the third-largest containerboard
     > and corrugated packaging manufacturer in the United States.
     > It produces over 4 million tons of containerboard annually.
     > The company’s share of the domestic containerboard market
     > is about 10%. The firm differentiates itself from larger
     > competitors by focusing on smaller customers and operating
     > with a high degree of flexibility.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 6.8% and 9.8%, respectively. Lines are mostly up and parallel except for a sales decline in ’15 and sales + EPS declines in ’14, ’19, and ’20. PTPM has been higher than peer and industry averages, trending up from 11.3% to 16.1% with a last-5-year mean of 13.4%.

Also over the past decade, ROE has trended lower from 39.9% in ’13 to 24.9% in ’22 with a last-5-year mean of 22.8%: roughly equal to peer and industry averages. Debt-to-Capital is lower than peer and industry averages and has trended down from 66.2% in ’13 to 43.2% in ’22 with a last-5-year mean of 45.5%. Quick Ratio and Interest Coverage are 1.8 and 20.4, respectively. M* gives a Standard rating for Capital Allocation while Value Line gives an A rating for Financial Strength.

With regard to sales growth:

• CNN Business projects contraction of 7.1% YOY and 3.0% per year for ’23 and ’22-’24 (based on 11 analysts).
• YF projects YOY 6.0% contraction and 0.9% growth for ’23 and ’24, respectively (8 analysts).
• Zacks projects YOY contraction of 7.2% and 0.4% growth for ’23 and ’24, respectively (4).
• Value Line projects 3.4% growth per year from ’22-’27.
• CFRA projects 7.5% YOY contraction and 1.2% growth per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 0.5% along with a 1.9% annualized growth projection x10 years (analyst note).

I am forecasting conservatively below the long-term range at 1.0%.

With regard to EPS growth:

• CNN Business projects contraction of 26.8% YOY and 14.3% per year for ’23 and ’22-’24, respectively (based on 11 analysts), along with 5-year annualized growth of 1.0%.
• MarketWatch projects annualized contraction of 13.4% and 6.5% for ’22-’24 and ’22-’25, respectively (11 analysts).
• Nasdaq.com projects 2.7% YOY contraction and 0.1% per year growth for ’24 and ’23-’25 (6, 5, and 3 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 3.0%.
• YF projects YOY 25.2% contraction and 1.1% growth for ’23 and ’24, respectively (8), along with 5-year annualized contraction of 12.7%.
• Zacks projects YOY 18.2% contraction and 0.9% growth for ’23 and ’24, respectively (5), along with 5-year annualized growth of 5.0%.
• Value Line projects annualized growth of 5.5% from ’22-’27.
• CFRA projects contraction of 28.1% YOY and 13.5% per year for ’23 and ’22-’24 along with a 3-year CAGR of 2.0%.
• M* projects long-term contraction of 1.6%.

I am forecasting below the mean (0% for six long-term estimates) at -1.0%. I will use Q1 ’23 EPS of $10.42/share (vs. ’22 EPS of $11.03) as the initial value.

My Forecast High P/E is 14.0. Over the past decade, high P/E has ranged from 14.4 (’13) to 28.7 (upside outlier in ’20) with a last-5-year mean (excluding the outlier) of 16.4. The last-5-year-mean average P/E is 13.8.

My Forecast Low P/E is 10.0. Over the past decade, low P/E has ranged from 8.5 (’13) to 14.7 (’20) with a last-5-year average of 12.0. I am forecasting toward the lower end of the range (10-year median is 11.6).

My Low Stock Price Forecast (LSPF) is $94.20. Since high EPS is based on 1.0% annualized contraction, I will arbitrarily use 2.0% annualized contraction x5 years to calculate low EPS of $9.42/share. This LSPF is 27.8% less than the last closing price and 14.8% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 33.8% (’13) to 69.6% (upside outlier in ’20) with a last-5-year mean (excluding the outlier) of 42.5%. I am forecasting toward the lower end of the range at 34.0%.

These inputs land PKG in the SELL zone with a U/D ratio of 0.2. Total Annualized Return (TAR) is 3.6%.

PAR (using Forecast Average—not High—P/E) is 0.9%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 36 studies over the past 90 days (my study along with 10 other outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 4.7%, 5.0%, 16.8, 11.5, and 45.8%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 19.0. This is [much] higher than MS (14.2) and mine (12.0). MOS is robust in the current study.

MS high and low EPS are $14.02/share and $9.67/share in contrast to my $9.91 and $9.42. My high EPS is lower due to a lower EPS growth rate.

MS LSPF of $108.50 is 15.2% greater than mine and implies a low P/E of 11.2, which is relatively consistent with the above-stated 11.5. MS LSPF is only 4.9% less than the $9.67 * 11.8 = $114.11 default value: also relatively consistent. Being just 17.0% less than the previous close, however, is somewhat aggressive from a zoning standpoint.

I would look to re-evaluate the stock under $105/share. PKG is going to be a tough buy for me until I can clearly see some growth. This will be more likely once the FY concludes and ’22 EPS is off my books.