Estimates have been rising for Packaging Corporation of America (PKG) after the company delivered better than expected results for its fourth quarter on January 23.
It is a Zacks #2 Rank (Buy).
Based on consensus estimates, analysts project 19% EPS growth this year and 20% next year. On top of this growth, it pays a dividend that yields 2.8%.
Company Description
Packaging Corporation of America produces containerboard and corrugated packaging products in the United States. It is headquartered in Lake Forest, Illinois and has a market cap of $2.8 billion.
Fourth Quarter Results
Packing Corporation delivered better than expected fourth quarter results on January 23. Earnings per share came in at 40 cents, beating the Zacks Consensus Estimate of 37 cents. This was down from 52 cents per share in the same quarter last yield, however, due in large part to cost inflation.
Sales rose 4% to $654 million, well ahead of the Zacks Consensus Estimate of $638 million. Corrugated products shipments increased 9% per workday over the same period.
The gross profit margin declined from 23.5% to 20.5% of net sales due to the aforementioned cost inflation. This led to a 15% decline in income before interest and taxes.
Outlook
Following better than expected Q4 results, analysts revised their estimates higher for both 2012 and 2013. This sent the stock to a Zacks #2 Rank (Buy).
The Zacks Consensus Estimate for 2012 is now $1.92, representing 19% growth over 2011 EPS. The 2013 consensus estimate is currently $2.29, corresponding with 20% growth.
Analysts expect strong volumes and share buybacks to drive double-digit EPS growth over the next couple of years.
Returning Value to Shareholders
Packaging Corporation generates strong free cash flow and has been using that cash to return value to shareholders through dividends and share repurchases.
Through the first 9 months of 2011, the company spent over $93 million buying back its stock. And in December, the company announced that it was authorized to repurchase an additional $150 million in common stock.
It also pays a dividend that yields a solid 2.8%. The company cut its dividend in half back in early 2009 amid the Great Recession, but increased it by 33% early in 2011.
Its current payout ratio is 46%, so as long as it continues to grow EPS, expect more dividend hikes on the way.
The valuation picture looks reasonable with shares trading at 15.0x 12-month forward earnings, a discount to its 10-year median of 17.3x.
Its price to book ratio of 2.9 is in-line with its 10-year median and a discount to the industry median of 3.1.
The Bottom Line
With rising estimates, strong growth projections, a solid 2.8% dividend and reasonable valuation, Packaging Corporation offers investors attractive total return potential.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.
