A Fundamental Play On Global Trends
The evidence that the post-pandemic rebound has legs and is self-sustaining continues to grow. At the macro-level, trends sparked by the pandemic have sparked new trends that are supporting employment and economic activity across the country. One of those trends lays within the paper and packaging industry. While not a secret, these trends first came to my attention when International Paper (NYSE:IP) was upgraded and then cemented as an investment thesis when Graphic Packaging Company (NYSE:GPK) reported its results in mid-October.
To put it simply, the pandemic has spurred not only a need for social distancing but accelerated the shift to digital that was already underway. In most cases, this means reliance on eCommerce be it direct-to-consumer shipping or a simple curbside pickup, both of which rely on the packaging industry. Indirect evidence of the increase in demand for packaging is in the eCommerce figures themselves. Companies like Williams Sonoma (NYSE:WSM) and Tractor Supply (NASDAQ:TSCO) are reporting high-double-digit to triple-digit increases in eCommerce channels. Other evidence is in the trucking sector where rising demand and constrained supply are putting upward pressure on cost.
Packaging Corporation Of American Quietly Beats Estimates
Packaging Corporation of America (NYSE:PKG) reported its Q3 2020 results and beat consensus to little fanfare. I make note of this because the packaging sector, and this stock, have seen a flurry of positive activity from the community over the past month or so. The latest for shares of PKG comes from BMO Capital in the form of an upgrade. BMO upgraded PKG along with IP and some others based on demand growth and pricing trends so the Q3 beat carries some weight.
That said, the top line revenue came in at $1.69 billion or down -3.4% from last year. That’s the bad news, the good news is that revenue topped the consensus by 300 basis points. Adding to that is an improvement in the margin that helped drive bottom-line results above consensus as well. On the bottom line, GAAP EPS beat the consensus by $0.09 while the more comparable adj EPS beat by $0.15. The company did not give any guidance but commentary from the CEO supports the consensus call of double-digit growth in the coming year.
“Looking ahead as we move from the third and into the fourth quarter, in our Packaging segment we expect corrugated products demand to remain strong. Although shipments will be lower than the third quarter with three less shipping days, volume should be higher than last year’s record fourth-quarter shipments. Higher containerboard production will help us build some inventory prior to year-end as we prepare for first quarter 2021 scheduled maintenance outages and expected continued strong demand. Earlier this month, we communicated price increases to our containerboard and box customers and we’ll be implementing these during the quarter and into next year,” said Mark W. Kowlzan, Chairman and CEO.
The Packaging Corporation Of America Pays A Healthy Dividend
The Packaging Corporation of America pays a dividend that is not only substantial but safe. The 2.75% yield is backed up by a history of increase that is robust if not consistent. Over the past ten years, the company has only made increased with a CAGR in the range of 15%. The company’s payout ratio is low, 58% of consensus earnings, and 50% on a YTD basis, so no reason to fear a cut. Looking to the balance sheet, the company has some debt but is a moderate amount and balanced by a high cash position, good coverage, and a low 3.35X leverage ratio.
The Technical Outlook: Setting Up To Buy Packaging Corporation of America
Packaging Corporation of America has had a good run since the March lows. The stock recouped all the pandemic losses and moved up to set a new high. Now, even with the great 3Q results, shares are pulling back and is setting up for the next buying opportunity. The level we need to watch now is the $112/$113 level near the short-term moving average. This level is consistent with past resistance and a previous high so has the potential to produce some strong market reactions. If support is confirmed at this level it would signal a buy, if not then we may see price action fall down to the $110 to $105 region.
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