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Packaging Corp (PKG) Gains From Strong Demand Amid Higher Costs

Packaging Corporation of America PKG is benefiting from forecast topping second-quarter 2022 results. Escalating demand for packaging stemming from the booming e-commerce activities and higher requirements for meat, fruit and vegetables, processed food, beverages, medicine and other consumer products continue to aid growth. Focus on buyouts and price-increase actions will also drive growth. Mill outage costs, higher freight, logistics expenses, unprecedented cost inflation and supply-chain issues will dent margins.

Strong Packaging Demand for Consumer Products

Demand in the Packaging segment, which contributes around 91% to the company’s revenues, continues to be strong. Packaging products are essential for distributing food, beverage and pharmaceutical products that will continue to support its Packaging segment’s revenues. Apart from this, Packaging Corp will continue to benefit from the e-commerce boom that raised the demand for boxes. Demand for containerboard and corrugated products remains strong across most of the company’s end markets. The company’s containerboard mills set new record second-quarter production and sales volume. This momentum is anticipated to continue in the remaining period of the current year.

Focus on Expanding Mill Capacity

Packaging Corp completed the planned maintenance outage at the Jackson mill during the third quarter of 2021. The mill restarted the number 1 machine and began producing uncoated freesheet grades. This machine will help address customers’ strong demand for box plants and maintain targeted inventory levels. The mill’s number 3 machine produces linerboard to meet strong packaging demand and maintain appropriate inventory levels in the packaging segment. In February 2021, the company announced discontinuing the production of uncoated freesheet (UFS) paper grades on the machine. It plans to permanently convert the machine to produce linerboard in a phased approach over the next three years. This move will provide much-needed internal linerboard supply and enable the company to optimize and enhance current mill capacity and box plant operations.

Strategic Acquisitions

In December 2021, Packaging Corp acquired all of the assets of Advanced Packaging Corporation in a cash-free transaction. The deal supports Packaging Corp’s focus on enhancing its containerboard portfolio through organic box volume growth and strategic box plant acquisitions. The company’s containerboard integration is anticipated to increase by almost 80,000 tons. This will bolster mill capacity and box plant operations. The deal is expected to be accretive to earnings this year.

Upbeat Outlook

Packaging Corp projects earnings per share to be around $2.80 in third-quarter 2022, which indicates year-over-year growth of 4%. Its Packaging segment will benefit from the ongoing strength in demand. The company expects price hikes across both segments will offset the impact of cost inflation. In the Paper segment, the company announced an additional $60 per ton price increase on all paper grades, effective with shipments beginning Sep 6.

Escalating Costs & Supply Chain Challenges

The company expects higher scheduled outage costs at the International Falls paper mill in the third quarter as it postponed the scheduled outage due to excessive flooding in the area prior to the outage. Continued rail service challenges along with rail fuel surcharges will result in higher freight and logistics expenses in the September-end quarter. These factors are expected to weigh on earnings in the third quarter. The company continues to face unprecedented inflation in most of its operating and converting costs. Higher gas, purchased electricity and chemical prices and increased labor costs remain headwinds.

Price Performance

Packaging Corp’s stock has lost 4.2% in the past year compared with the industry’s fall of 0.9%.

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Zacks Investment Research

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Zacks Rank & Other Stocks to Consider

Packaging Corp currently flaunts a Zacks Rank #3 (Hold).

Some better-ranked stocks from the Industrial Products sector are Greif Inc. GEF, Titan International TWI and MRC Global MRC. All of these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Greif has an estimated earnings growth rate of 37% for the current year. In the past 60 days, the Zacks Consensus Estimate for current-year earnings has been revised upward by 17%.

Greif pulled off a trailing four-quarter earnings surprise of 22.9%, on average. GEF’s shares have risen 17% in the past year.

Titan International has an estimated earnings growth rate of 165% for the current year. In the past 60 days, the Zacks Consensus Estimate for current-year earnings has been revised upward by 43%.

Titan International pulled off a trailing four-quarter earnings surprise of 56.4%, on average. TWI’s shares have soared 101% in a year.

MRC Global has an expected earnings growth rate of 259% for 2022. The Zacks Consensus Estimate for the current year’s earnings moved up 24% in the past 60 days.

MRC Global has a trailing four-quarter earnings surprise of 140.8%, on average. MRC’s shares have surged 35% in the past year.

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