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Packaging Corporation of America: Buy The Dip

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Packaging Corporation of America (NYSE: PKG) had a solid quarter but gave tepid guidance, sending the shares down by 4%. The move is ugly at face value, but, as they say, it's in the eye of the beholder. Investors could view the decline as a loss, a time to sell, or a reason to stay out of the market, but it would be a mistake. Packaging Corporation of America is a solid business with ample cash and capital return experiencing a market reset, not a meltdown. 

The guidance is tepid but likely the low in the turnaround story. The underlying metrics in Q1 show demand underpinning business, rising prices, and low inventory to sustain them. Revenue growth is back in the picture now; the forecast is for earnings growth to return by the end of the year, but it may take more time than previously hoped for this industrial stock

Packaging Corporation of America Outperforms on Solid Demand 

[content-module:CompanyOverview|NYSE:PKG]

Packaging Corporation of America had a solid quarter in Q1 2024, producing $1.98 billion in revenue. The top line is flat compared to last year, but 360 basis points are above the consensus reported by Marketbeat due to demand in both operating segments. Volume and mix were offset by lower prices, which are down compared to last year but are strengthening now. Packaging reported an 11% increase in comparable daily shipments and is forecasted to remain strong. Paper volume is also up and projected to be strong. 

Margin news is mixed. The company reported $1.72 in adjusted earnings, a decline of $0.48 compared to last year. The decline is due to lower prices and mix, a longer-than-expected outage, higher expenses, and increased depreciation. The $1.72 is above the consensus, but the outperformance is weak in light of the top-line strength, and the margin weakness is forecast to persist into Q2. 

The guidance is the same mixed bag. The company did not give a top-line figure but expects volume demand to remain solid and prices to solidify. However, a scheduled outage will impact volume, and other problems exist. Higher freight and tax costs will impact EPS, resulting in a lower-than-expected result. The offsetting factors are that the outage impact will be short-lived, and the $2.07 in forecasted earnings is sufficient to sustain the dividend and balance sheet health until earnings growth resumes. 

PKG Market Moves to Realign With Analysts' Sentiment

Analysts' sentiment helped to drive PKG stock prices to their highs in March and April, but the market front-ran the trend, setting itself up for a correction. The stock price has now been corrected to the consensus target, up 30% in the last twelve months and is unlikely to fall now. Sentiment is up to Hold from Reduce and will likely trend higher over the coming quarters. Business results are lackluster, but a pivot is at hand. Revenue growth should continue and then accelerate in 2025, with earnings growth following suit. Institutional activity has also been bullish; expect that group to buy on the dip. 

The technical action following the release is favorable to long-term investors. The market is down but shows solid support at the 150-day moving average, consistent with the uptrend. PKG stock prices may not rebound significantly soon, but a deeper decline is not expected. The critical support level is near $170 and unlikely to break now without another change in the outlook; the market has sold off and capitulated after a momentum-driven rally and realigned with sentiment. 

Packaging Corporation of America offers a relatively high yield and value trading at these levels. The stock is paying $5.00 per share after several aggressive dividend increases and yields 2.9% today. The payout is reliable at 60% of this year's diminished earnings outlook and 50% of next year's, so it is sustainable if not growing. PKG has a history of distribution increases but failed to raise the payment last year and may not do so this year. 

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