PKG Packaging Corporation of America
Best-in-class box maker at a cyclical trough; the price already assumes a full return to mid-cycle margins.
The story
PKG is the most profitable large US containerboard and corrugated box producer, thanks to a highly integrated mill-to-box system and disciplined capacity management. It is a mature, cyclical business, and the Greif containerboard acquisition just raised revenue to about $9.5B. Margins have fallen from the 2022 peak of 17% to about 11% because of weak box demand, integration costs and higher input costs. The investment case rests on margins recovering to mid-cycle levels as acquired mills are optimized and box demand stabilizes, not on structural growth.
Year-1 growth reflects a full year of the acquired Greif mills plus modest pricing, then fades toward nominal GDP. The target margin of 15% is PKG's mid-cycle level: above today's trough-like 10.9% but well below the 2022 peak of 16.9%. Sales-to-capital of 1.4 sits above the TTM figure of 1.11, which is depressed by acquisition goodwill, because maintenance-plus-growth capex in a mature industry is more efficient at the margin. Beta of 1.0 fits a low-leverage, best-in-class operator in a cyclical sector.
Value drivers
| Revenue growth (Y1) | 5.0% |
| Terminal growth | 2.5% |
| Forecast horizon | 7y |
| Target operating margin | 15.0% |
| Years to target margin | 4 |
| Sales-to-capital | 1.40 |
| Beta | 1.00 |
| Failure probability | 1.0% |
| Cost of capital (WACC) | 9.0% |
| Terminal WACC | 9.0% |
Valuation bridge
| PV of explicit FCFF | 4.43B |
| PV of terminal value | 8.70B |
| Equity value | 9.59B |
| ÷ shares → per share | $107.67 |
News
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Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 10.01B | 5.0% | 11.9% | 898.18M | 340.52M | 557.65M | 511.54M |
| 2 | 10.47B | 4.6% | 12.9% | 1.02B | 327.76M | 692.76M | 582.93M |
| 3 | 10.91B | 4.2% | 14.0% | 1.15B | 311.62M | 835.98M | 645.27M |
| 4 | 11.32B | 3.8% | 15.0% | 1.28B | 292.14M | 986.23M | 698.28M |
| 5 | 11.69B | 3.3% | 15.0% | 1.32B | 269.42M | 1.05B | 682.97M |
| 6 | 12.03B | 2.9% | 15.0% | 1.36B | 243.60M | 1.12B | 664.83M |
| 7 | 12.33B | 2.5% | 15.0% | 1.39B | 214.89M | 1.18B | 644.12M |
Key risks
- Industry containerboard capacity additions and weak box demand delay margin recovery
- Integrating the Greif mills costs more or yields fewer synergies than planned
- OCC fiber, energy and freight cost inflation squeezes spreads
Catalysts
- Announced containerboard price increases stick as industry inventories tighten
- Visible synergy capture and margin expansion at the acquired mills