Packaging Corporation of America (PKG) – Bull Case

We came across a bull case thesis on Packaging Corp of America (PKG) on Valueinvestorsclub authored by rab. We find articles on VIC thoroughly researched by aspiring analysts, who tend to think out of the box. Click here for the full article. Here is the summary.

The third-largest manufacturer of containerboard and corrugated packaging products for use in protecting goods during shipment, PKG, went public in 2000. The Illinois-headquartered company also produces multi-color boxes and displays, as well as meat and wax-coated boxes for the agricultural industry. With over 15,000 employees and market cap of over $10 billion, PKG is widely covered by market analysts. The senior management’s remuneration is tied to the company’s earnings target, and other related parameters.

With 70% of packaging customers confined to the local and regional sectors, PKG is able to book highest industry margins.

In the paper segment Office Depot contributes to almost half of the segment sales. The supply agreement between PKG and Office Depot is due to expire at the end of 2022. A renewal of the agreement is crucial to avoid a sales slowdown from 2023 in the paper segment.

Although PKG took over Boise Cascade in 2013 yet Georgia Pacific, International Paper, and WestRock are still counted as national competitors for the company, in addition to some smaller independent local players.

A low debt ratio of 1.9x vs the 10-year average of 2.1x, positive free cash flow for over 10 years, and adequate liquidity on the balance sheet to cover interest has helped PKG retain investment grade rating for many years. With Boise Cascade acquisition behind it, the company is now focused on organic growth.

With strong cost-containment and proven track record of double-digit ROIC, PKG is well-positioned to see a recovery in its ROE, which is currently at below historical average. Sitting at fair-valuations, PKG is a candidate for accumulation as a potential takeover target by International Paper or WestRock.

Major risks that could derail the EPS growth include inappropriate allocation of cash and inadequate diversity in product and geographic coverage.

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