In for a few shares of PKG this week.
Called a value stock by Meryl Witmer in Barron's, it doesn't seem like it to me.
From Barron's mid-year round table:
"Packaging Corp. of America [PKG] is the lowest-cost producer of containerboard in the U.S. It converts 80% into boxes. The company was spun out of Pactiv [PTV] and then taken private by Madison Dearborn in a leveraged buyout in 1999. It came public in 2000 and has paid down $1.2 billion of debt. It is a cash machine. The industry structure improved dramatically after International Paper [IP] acquired Weyerhaeuser's [WY] containerboard business in 2008 and closed plants that represented about 12% of industry capacity. Packaging Corp. finds local customers for its finished boxes and focuses on smaller businesses, where it can get better pricing. Even in the economic crisis, it was profitable.
"The industry is very short of inventory. Eighty percent of global containerboard manufacturing uses recycled fiber, known as OCC. Demand for OCC has increased significantly due to growing demand for containerboard and the lack of virgin fiber, or lumber, outside the southeast U.S. and Scandinavia. Packaging Corp.'s products are made from wood chips, so OCC price increases have little effect on its costs. But they might improve profitability, as end-product prices tend to move with OCC prices. When the new contract prices are fully implemented, Packaging Corp. should make about $1.90 a share. Its capital spending is about 50 cents a share less than depreciation, yielding free cash flow of about $2.40.
"Plus, there's a 2.7% dividend yield. (edit: stock's moved up since June, yield now 2.3%)
"And the yield might go up. We see total free cash flow of $3.05 a share in 2012, due to energy-efficiency and capacity-expansion projects. We like the management team and the way they have allocated capital and strengthened the balance sheet. Management may soon allocate some of its bounty to dividends and a share repurchase. We see the stock trading north of 30 a share in about a year and a half."
She recommended the stock again in Oct. in a Barron's interview:
online.barrons.com
I've read the same argument by another analyst: Containerboard, OCC, has been in short supply, but PKG uses wood chips (of which presumably there's no shortage as with OCC), so PKG's input costs are lower than competitors, ergo that much better for PKG.
I'm not so sure that this positive aspect of PKG (assuming it's even true) isn't already reflected in PKG's stock price: stock doesn't seem a bargain as I look at some of its metrics - p/bk, p/sales. So I'll chance just a few shares. |
