Packaging Corp. of America Not Buying Into M&A Trend

By
A A A

While other companies in the containerboard and corrugated packaging industry have fattened up on buyouts over the last couple of years, Packaging Corp. of America has kept its focus on internal growth.

Packaging Corp. ( PKG ), or PCA, is North America's fifth-largest producer of containerboard and corrugated products. It mainly serves the food, beverage, paper and agricultural markets.

The company's products include protective packaging, multicolor boxes and retail merchandising displays. It has four containerboard mills and 69 box plants in 26 states and operates one business segment under the name Containerboard & Corrugated Containers.

PCA has enjoyed steady if modest growth over the past few years. It logged 2012 revenue of $2.8 billion, which is 23% more than it delivered five years earlier.

In contrast,Rock-Tenn ( RKT ), the second largest publicly traded company in the paper and paper products space, saw its annual revenue nearly quadruple to $9.2 billion from 2007 to 2012. Rock-Tenn's top line got a big boost from its 2011 acquisition of Smurfit-Stone Container for $3.5 billion.

Another Deal

That buyout was followed by another major deal last year involvingInternational Paper ( IP ), the industry's biggest player with $27.8 billion in 2012 revenue.

International Paper spent $4.5 billion to acquire shipping-box manufacturer Temple-Inland in a transaction that gave the combined firm more than one-third of the North American corrugated-packaging market.

While those deals were going on, PCA put its focus where it usually does: on improving its own operations. That strategy has served the company well, analysts say.

"Packaging Corp. of America benefits from a lean operational model and highly focused management," Citigroup analyst Anthony Pettinari noted. "In an industry marked by value-destroying acquisitions, ( PAC ) management has been extremely judicious in capital deployment."

The question is how long PCA can sit on the sidelines as the industry's biggest players gain more size and leverage.

PCA had a chance to add production capacity last summer when International Paper was forced to sell three U.S. containerboard mills to meet a Department of Justice settlement related to the Temple-Inland purchase. But PCA stayed out of the bidding.

In a note, Morningstar said it was "surprised" PCA did not acquire one of those mills, but added the decision not to "underscores PCA's desire to remain a small and efficient operator."

"For more than a decade, (PCA) has maintained only a single-digit share of the U.S. containerboard market, but has exploited its small size by being nimble and focused solely on containerboard," Morningstar said.

One benefit of the strategy is that PCA has produced more consistent profit growth than its larger rivals in recent years.

PCA has posted earnings gains in nine of the last 12 quarters. That compares to six times each for International Paper and Rock-Tenn over the same time frame.

All containerboard and corrugated product companies face a multitude of potential head winds.

They operate in a highly cyclical industry and can be negatively impacted by economic slumps, bad weather and rising raw materials prices.

Lately, the industry has dealt with rising costs by trying to pass along higher prices to customers.

On Feb. 21, it was reported that Georgia-Pacific, a containerboard supplier owned by Koch Industries, plans to raise its price for containerboard by $50 a ton this Spring.

The increase would move the benchmark price for containerboard to around $740 a ton.

Not coincidentally, the day that news was announced the 25 stocks in IBD's paper and paper products group rose 1.7%. PCA's stock price climbed more than 4%. The company's shares have been on a steady rise since early June and touched a record high of 42.46 on Feb. 25.

A similar industrywide price hike was instituted last summer. Although there's always a risk that customers will cut down on their orders when faced with higher prices, Packaging Corp. seems to have weathered last year's hike well enough.

Higher prices helped PCA grow Q4 sales 13% from the prior year to $736.6 million. It was the company's first double-digit revenue gain in nearly two years.

Mill Upgrades

Meanwhile, PCA's bottom line has gotten a lift from efforts to upgrade two of its mills so they are more energy and cost-efficient.

In a note, D.A. Davidson analyst Steven Chercover said PCA's 2012 EBITDA margin of 21.9% "is believed to be a record and should compete for best in class in the industry."

PCA reported fourth-quarter earnings of 61 cents a share, up 53% from the prior year but a penny shy of consensus views. However, the company's quarterly revenue easily surpassed views.

Corrugated product shipments during Q4 climbed 5.8% per workday, while total shipments increased 7.6%. Containerboard production rose by 12,000 tons to 652,500.

On Jan. 14, PCA raised its annual dividend by 25% to $1.25 per share.

"In addition to being best in class from an operational standpoint, the company is rock solid from a financial standpoint, with a conservative balance sheet and track record of returning excess capital to shareholders," Chercover said.

Analysts polled by Thomson Reuters expect PCA to grow earnings 34% this year and 15% in 2014.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: IP , PAC , PKG , RKT

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos

Stocks

Referenced

80%
100%
100%
75%

Most Active by Volume

89,865,296
  • $16.21 ▲ 0.81%
75,109,464
  • $2.72 ▲ 3.03%
66,341,418
  • $97.67 ▲ 1.46%
62,511,232
  • $93 ▲ 1.32%
61,561,006
  • $75.95 ▲ 4.57%
57,374,027
  • $3.21 ▲ 69.84%
49,928,586
  • $24.82 ▲ 2.35%
39,880,670
  • $43.63 ▲ 2.08%
As of 10/17/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com