PKG Stock Study (2-3-23)

I recently* did a stock study on Packaging Corp. of America (PKG) with a closing price of $145.09.

M* writes, “Packaging Corp of America is the third-largest containerboard and corrugated packaging manufacturer in the United States.”

This medium-sized company has grown sales and earnings at annualized rates of 6.8% and 9.8%, respectively, over the last 10 years. Lines are mostly up and parallel except for EPS declines in ’14, ’19, and ’20. PTPM has trended higher over the last 10 years from 11.3% to 16.1% with a last-5-year average of 13.4%. This is significantly higher than peer (stated as CAS.TO, SEE and REYN) and industry averages.

ROE has trended mostly flat since 2014 with a last-5-year average of 23%. Debt-to-Capital has trended lower since 2013 with a last-5-year average of 46.1% (data not available for ’22), which is significantly lower than peer and industry averages. Quick Ratio and Interest Coverage seem acceptable at 1.92 and 11, respectively.

I assume long-term annualized sales growth of 1% based on the following:

• CNN Business projects 3.5% YOY contraction and 1.2% contraction per year for ’23 and ’22-’24, respectively (based on 9 analysts).
• YF projects 3.7% YOY contraction and 0.8% YOY growth for ’23 and ’24, respectively (8 analysts).
• Zacks projects YOY contraction of 4.2% and 0.8% for ’23 and ’24, respectively (4).
• Value Line projects 5.3% growth per year from ’21-’26.
• CFRA projects 1.5% YOY contraction and 0.7% growth per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year growth estimate of 1.1%.

I assume long-term annualized EPS growth of 1% based on the following:

• CNN Business projects 17% YOY contraction and 8.8% contraction per year for ’23 and ’22-’24, respectively (based on 9 analysts) along with 5-year annualized growth of 1%.
• MarketWatch projects annualized contraction of 8.3% and 4.9% for ’22-’24 and ’22-’25, respectively (13 analysts).
• Nasdaq.com projects 0.9% YOY contraction and 0.3% per year growth for ’24 and ’23-’25, respectively (6, 5, and 2 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 5-year annualized growth of 3%.
• YF projects YOY contraction of 17.3% for ’23 and 5-year annualized contraction of 7.7% (8).
• Zacks projects YOY contraction of 18.2% and 0.9% for ’23 and ’24, respectively, along with 5-year annualized growth of 5% (5).
• Value Line projects annualized growth of 8.4% from ’21-’26.
• CFRA projects 16.8% YOY contraction and 8.3% contraction per year for ’23 and ’22-’24, respectively, along with 3-year annualized growth of 2%.
• M* estimates long-term annualized contraction of 1.6%.

My Forecast High P/E is 14. Over the last 10 years, high P/E has ranged from 14.4 (’13) to 28.7 (upside outlier in ’20) with a last-5-year average (excluding the outlier) of 16.4.

Forecast Low P/E is 8. Over the last decade, low P/E has ranged from 8.5 (’13) to 14.7 (’20) with a last-5-year average of 12.

My Low Stock Price Forecast of $88.10 is default. This is 39% below the last closing price. The low of the last two years is $110.60, but given such dim growth prospects, the Forecast Low P/E seems reasonable.

All this results in an U/D ratio of 0.3, which makes PKG a SELL. The Total Annualized Return computes to 4.7%.

Over the last 10 years, Payout Ratio has ranged from 33.8% (’13) to 69.6% (upside outlier in ’20) with a last-5-year average (excluding the outlier) of 42.5%. I used 34% as a conservative estimate.

Although the current yield (3.4%) is a bright point for this stock, a PAR (using Forecast Average, not High, P/E) of 0.5% is an exclamation point for what is otherwise a depressing stock study. One of BI’s core principles is to buy stock in high-quality growth companies. While PKG has demonstrated consistent historical growth, the outlook for future growth is muddy at best. With the stock up about 17% in just over three months, it’s now far past the BUY zone.

I like to assess margin of safety (MOS) by comparing my inputs with Member Sentiment (MS). Out of 68 studies over the past 90 days, projected sales, projected EPS, Forecast High P/E, and Forecast Low P/E average 5.4%, 6.3%, 17.8, and 11.8. I am dramatically lower on all inputs. Value Line also projects an average annual P/E of 19, which is higher than MS 14.8 and much higher than my 11. I do see a large MOS in this study, but with the wide range of long-term EPS estimates on either side of zero, I also see good reason to be conservative.

MS has a Low Stock Price Forecast of $107.55, which seems reasonable being 20%+ below the last closing price. I just cannot be convinced to raise mine at this time, however [which would increase the U/D ratio]. Seven long-term EPS growth estimates average 1.7%. My forecast is not much lower, and I would not be surprised to see P/E fall to the bottom of its 10-year range given such anemic growth.

*—Publishing in arrears as I’ve been doing one daily stock study while posting only two blogs per week.