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
Packaging Corp. (
), 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 &
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 (
), 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
That buyout was followed by another major deal last year
involvingInternational Paper (
), the industry's biggest player with $27.8 billion in 2012
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
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
) management has been extremely judicious in capital
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
"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
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.
Meanwhile, PCA's bottom line has gotten a lift from efforts to
upgrade two of its mills so they are more energy and
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
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
"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.