We are raising our rating on Packaging Corp. of America (PKG) to "buy" from "hold" and setting a target price of $118, notes David Coleman, a leading analyst with Argus Research.
Our upgrade reflects the increased use of paper products as consumers stock up on goods in response to the coronavirus. We also expect restaurant closures and other restrictions related to the pandemic to increase the use of paper products.
Packaging Corp. of America is a manufacturer of containerboard and corrugated products. It is one of the largest producers of containerboard products and the third-largest producer of uncoated freesheet paper in the North America.
The company produces various corrugated packaging products, including conventional shipping containers used to protect and transport manufactured goods.
PKG also produces multicolor boxes and displays for packaged retail products and meat boxes and wax-coated boxes for agricultural suppliers. Packaging Corp. of America was founded in 1867, and operates six containerboard mills and 95 corrugated products plants and related facilities.
On January 29, Packaging Corp. reported fourth-quarter and full-year results. Excluding special items, adjusted 4Q net income fell to $235.8 million or $1.71 per share from $290.4 million or $2.17 per share a year earlier.
However, EPS beat the consensus estimate and our forecast by $0.01. Fourth-quarter revenue was $1.7 billion, flat with the prior year. According to management, the 4Q results reflected lower prices and volume and a weaker product mix.
For the full year, the company reported adjusted net income of $1.058 billion or $7.65 per share, down from $1.100 billion or $8.05 per share in 2018. Full-year revenue was $7 billion in both 2019 and 2018.
In May 2018, PKG raised its quarterly dividend by 20% to $0.79, or $3.16 annually. The current yield is about 3.4%. It previously raised the payout by 15% in September 2016 and by 37.5% in February 2015.
Our dividend estimates are $3.24 (reduced from $3.33) for 2020 and $3.34 (reduced from $3.36) for 2021. Our long-term rating remains a "buy".
