O

n Tuesday we mentioned Industrials and Materials as a possible “recession-proof” sector, citing its relative outperformance against the S&P 500, and the strength of its constituent subsectors. Today we'll move to Packaging, which has a high projected annual P/E growth rate of 4.5%, and a broader growth rate of nearly 15%.

Packaging Corporation of America

Several hot packaging stocks have already won over institutional investors. Mercer International ($MERC) and Veritiv Corp. ($VRTV) have strong institutional ownership and have already returned 36% and 98% respectively in the last year.

So why bother with Packaging Corp. of America ($PKG)? Relative valuation holds that $PKG trades at a premium to peers, with a 14x P/E and a 1.6x P/S. Sector averages are 13x P/E and 1.3x P/S after all. But, having returned less than 1% in the last year, it's a strong rotation candidate after the companies earnings surprise on Monday. Notable owners already include specialized hedge funds and the California State Teachers Retirement System, and the stock remains a net-buy among institutions.

Mercer International ($MERC) is a strong business but is exposed to cyclical products like framing lumber and wood pulp. These products are highly sensitive to economic conditions. Although Mercer trades at lower ratios than peers we believe it is less likely to grow into a higher valuation. $PKG on the other hand is highly concentrated in less cyclical products, both a risk and a benefit to ownership.

Annual PE Growth Rates, Industrials Sub-Sectors (Consensus)Source: Bloomberg

Monday’s earnings call reported an EPS of $3.23 in second-quarter 2022, beating the consensus estimate of $2.87. The bottom line improved 49% YoY. Revenues were $2.24 billion for the quarter ended June 2022, surpassing estimates by 4.91%. This compares to QoQ revenues of $1.88 billion. The company has topped consensus revenue estimates four times over the last four quarters and maintains an average earnings surprise of over 19%.

$PKG Institutional Quarterly Inflows and OutflowsSource: MarketBeat

On a global scale, the packaging industry is an enormous economic generator. Research indicates demand for the world packaging industry will reach $1.05 trillion by 2024. Consumer trends and industry trends for packaging will drive this gigantic growth rate.

$PKGs packaging business, which accounts for around 91% of its revenues, has been benefiting from strong demand in e-commerce and rising requirements for the packaging of food products, beverages, and medicines. Both containerboard and corrugated products demand remain strong across most of the company’s end markets. The company also maintains a balanced approach toward capital allocation to boost growth and maximize returns for shareholders.

The analyst consensus is a year-over-year earnings growth of 23.6%. This one may not be exciting, but as we've stressed before, capital preservation is just as important as capital gains.


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Only Degenerates, Tendies, and its analysts have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Posted 
Jul 28, 2022
 in 
Daily Nugget
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