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PKG Stock Study (9-12-23)

Posted by on November 30, 2023 at 06:46 | Last modified: September 12, 2023 13:53

I recently did a stock study on Packaging Corp. of America (PKG $146.26). My other studies are here and 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%. Lines are mostly up and parallel except for a sales decline in ’15 and sales + EPS declines in ’14, ’19, and ’20. PTPM is higher than peer and industry averages, trending up from 11.3% in ’13 to 16.1% in ’22 with a last-5-year mean of 13.4%.

Also over the past decade, ROE is roughly even with industry averages, trending lower from 39.9% in ’13 to 24.9% in ’22 with a last-5-year mean of 22.8%. Debt-to-Capital is lower than peer and industry averages, trending 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 2.0 and 19.6, respectively. M* gives a “Standard” rating for Capital Allocation while Value Line rates the company A for Financial Strength.

With regard to sales growth:

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

With regard to EPS growth:

My first attempt is to forecast -1.0% per year. This is below the 5-long-term-estimate mean (0%).

Things get tricky with a negative growth rate [which arguably should never happen for a high-quality stock] because I need to ensure high EPS exceeds low EPS. For high EPS, I will use ’21 EPS of $8.83/share: more than a 1% annualized discount for five years off 2023 Q2 EPS of $9.46/share (annualized). Low EPS will be ’19 EPS of $7.34/share.

While this sounds good, it results in a forecast high price lower than the previous close (invalid study).

For my second attempt, I will exclude the highest and lowest estimates. I’m really perplexed by the YF number anyway as its absolute value seems extreme compared to the others. This results in a 3-estimate mean and my forecast of 3.0%. As an initial value, I will use 2023 Q2 $9.46/share (annualized) rather than ’22 EPS of $11.03.

My Forecast High P/E is 14.0. Over the past decade, high P/E ranges from 14.4 (’13) to 28.7 (upside outlier in ’20) with a last-5-year mean (outlier excluded) of 16.4. The last-5-year-mean average P/E is 14.2. I am forecasting below the entire range.

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

My Low Stock Price Forecast (LSPF) is $110.60. The default value is $94.60, which is 35.3% less than the previous close and 14.5% less than the 52-week low. Because the analyst reports see headwinds easing by the end of ’23, I don’t see occasion for that much of a haircut. I will therefore use the 52-week low, which is 24.4% less than the previous close.

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 0.7%, 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 the 3.4% instead—still much lower than I seek.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 48 studies over the past 90 days (my study along with 16 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 5.3%, 6.6%, 16.8, 11.6, and 45.5%. 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).

MS high / low EPS are $14.00 / $9.83 vs. my $10.97 / $9.46 (per share). My high EPS is lower due to a lower growth rate.

MS LSPF of $109.90 implies a Forecast Low P/E of 11.2, which is lower than the above-stated 11.6. MS LSPF is 3.6% less than the default $9.83/share * 11.6 = $114.03, which results in more conservative zoning. MS LSPF is only 0.6% less than mine.

My TAR (over 15.0% preferred) is much less than the 13.0% from MS.

MOS backing the current study seems robust.

I track a few different valuation metrics. PEG is 3.6 and 5.0 per Zacks and my projected P/E, respectively: both significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is fair at 0.95. Kim Butcher’s “quick and dirty DCF” prices the stock at 22.0 * [$20.65 – ($6.50 + $7.85)] = $75.60, which suggests the stock to be 48.3% overvalued.

I would look to re-evaluate PKG under $121/share. With a forecast high price of $153.50, I would estimate TAR to qualify at or below $76.75/share. Hopefully as the quarters go by, we can get some resolution to the Value Line vs. YF long-term estimates.

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