Rising Costs Will Test Containerboard While Glendale Upgrades Boost Resilience

Key Takeaways

• Economic uncertainty and trade tensions could decrease containerboard volume and increase costs, negatively impacting revenue and demand.
  
• Rising operating and logistics costs, coupled with production volatility, could compress net margins despite price increases.
  
• Strategic execution in pricing and investments suggests strong revenue growth, margin improvement, and resilience, supporting future profitability amid economic uncertainty.

Catalysts

Manufactures and sells containerboard and uncoated freesheet (UFS) paper products in North America.

• The ongoing economic uncertainty and trade tensions are expected to weigh on demand, leading to lower containerboard volume and increased operating costs, potentially impacting revenue negatively.
  
• Despite price increases, operating costs have risen due to inflation across the cost structure, which could compress net margins if inflation persists and cost-cutting measures become less effective.
  
• Planned maintenance outages have been adjusted, incurring higher expenses in the second quarter and adding to production volatility. This could further dampen earnings projections as outage costs are set to increase significantly.
  
• The uncertainty surrounding global trade and tariffs, coupled with a cautious customer base, might result in slower order flows and unpredictable demand, which could impede revenue growth.
  
• Rail contract rate increases will result in higher freight and logistics expenses, compounding the cost pressures faced by the company and potentially squeezing net margins further.

Packaging Corporation of America Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Packaging Corporation of America compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Packaging Corporation of America's revenue will grow by 3.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.0% today to 11.5% in 3 years time.
• The bearish analysts expect earnings to reach $1.1 billion (and earnings per share of $11.66) by about July 2028, up from $856.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.6x on those 2028 earnings, down from 21.5x today. This future PE is lower than the current PE for the US Packaging industry at 27.7x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.44%, as per the Simply Wall St company report.

Packaging Corporation of America Future Earnings Per Share Growth

Risks

• Packaging Corporation of America reported increased sales in the first quarter of 2025, with net sales rising from $2 billion in 2024 to $2.1 billion, which could indicate strong revenue momentum.
  
• The company achieved significant margin improvement in its Packaging segment, driven by higher prices, increased volume, and sound execution of price increases, which could positively impact net margins.
  
• They successfully implemented price increases across both the Packaging and Paper segments, and these are expected to continue contributing to earnings, indicating potential for higher future earnings.
  
• The completion of strategic capital investments, such as the new high-efficiency box plant in Glendale, Arizona, which is increasing capacity and productivity while reducing costs, could support profitability enhancements.
  
• Despite economic uncertainty, the business is robust with bookings and billings up by 4.1% at the start of the second quarter, suggesting resilience in revenue and possibly higher sales in upcoming quarters.

Valuation

• The assumed bearish price target for Packaging Corporation of America is $148.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Packaging Corporation of America's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $244.0, and the most bearish reporting a price target of just $148.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $9.5 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 6.4%.
• Given the current share price of $206.32, the bearish analyst price target of $148.0 is 39.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.