Packaging Corporation Bets on E-Commerce Boom, Costs Ail

On Feb 25, we issued an updated research report on Packaging Corporation of America PKG. The company is poised to gain from solid demand for both of its segments and the e-commerce boom that will fuel demand for boxes.

Packaging Corporation of America recently reported fourth-quarter 2018 earnings, wherein adjusted earnings per share of $2.17 improved 39% year over year. Earnings beat the Zacks Consensus Estimate of $2.15 as well. Results were aided by better prices and mix in the Packaging and Paper segments, as well as lower tax rate and lower mill indirect costs, partly offset by lower-than-expected volume in the Packaging segment, as well as higher operating costs and freight expense.

For first-quarter 2019, Packaging Corporation expects continued solid demand in the Packaging segment for both containerboard volume and corrugated products volume will aid results. Upbeat market conditions are also anticipated to continue in the Paper segment.

However, higher labor and benefits costs, with annual wage increases and other timing-related expenses, will impact earnings in the current quarter. Though costs for freight and recycled fiber will be fairly flat, most of the chemical and repair and materials costs will remain inflated. Also, a seasonally colder weather will lead to higher energy usage and wood costs. The tax rate is likely to be slightly higher. Despite these headwinds, the company expects first-quarter earnings of around $1.97 per share, reflecting year-over-year increase of 27%.

The Zacks Consensus Estimate for the first quarter is at $1.97, reflecting 27% year-over-year growth. The Zacks Consensus Estimate for revenues is currently pegged at $1.76 billion, projecting 3.88% year-over-year growth.

Packaging Corporation will benefit from the e-commerce boom that will spur demand in boxes. These days, customers find a lot of different channels to sell-through, including e-commerce. The company has a wide base of customers and expects its business to grow in the near term.

The impact of annual maintenance outages at its mills in 2019 on lost volume, direct costs and amortized repair costs will collectively impact earnings per share by 59 cents for the current year. The current estimated impact by quarter in 2019 is 19 cents per share in the first quarter, 18 cents in the second quarter, 8 cents in the third and 14 cents per share in the fourth quarter.

The company maintains a balanced approach toward capital allocation in order to profitably grow the company, as well as maximize returns for its shareholders. The company ended full-year 2018 with $362 million of cash. In 2018, the company’s cash flow from operations was a record $1.18 billion and free cash flow was a record $629 million. Notably, during 2018, Packaging Corporation approved a hike of 25% in its regular quarterly dividend. Capital expenditures during the year were $551 million. It estimates capital spending for 2019 to be $390-$410 million.

Packaging Corporation carries a Zacks Rank #3 (Hold), at present.

Better-ranked stocks in the same sector include Axon Enterprise, Inc. AAXN, Alarm.com Holdings, Inc. ALRM and Dover Corporation DOV. While Axon Enterprise and Alrm.com Holdings sport a Zacks Rank #1 (Strong Buy), Dover carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Axon Enterprise has a long-term earnings growth rate of 25%

Alarm.com Holdings has a long-term earnings growth rate of 17%.

Dover Corporation has a long-term earnings growth rate of 12%.

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