“Containerboard and corrugated packaging is not the stuff of growth stocks, and so Packaging Corp. of America (PKG) is not a stock to buy and hold for a number of years. But the company is just beginning what looks to be a powerful turnaround that, combined with a reasonable valuation (19 times trailing earnings) and a healthy dividend (2.8% annual yield), should help the stock head higher.
“In the September quarter, the firm’s revenues inched up 8%, but earnings gained 28%, and there’s likely more where that came from. The reason: Years of sluggish demand caused industry capacity to be slashed, but now, with demand picking up, capacity is tight and prices are rising. Indeed, Packaging Corp. hiked prices for its containerboard by $50 per ton last quarter, which customers took without a fuss, and the firm expects a similar price hike for its corrugated products in this quarter; management expects the full benefit of these moves to be felt in the first quarter of 2013.
“Even so, the top brass expects December quarter earnings to rise more than 50% (which would be another quarter of acceleration), and analysts think next year could see the bottom line leap to $2.78 per share, up 34% from 2012. One last bullish catalyst could come from the dividend, which was actually 20% higher in the past despite lower earnings; it’s very likely a dividend boost or share repurchase plan could be enacted once the tax treatment of these moves is figured out in Washington.”
Mike Cintolo, Cabot Top Ten Trader, October 29, 2012
