Stock Analysis

Packaging Corporation of America's (NYSE:PKG) P/E Still Appears To Be Reasonable

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NYSE:PKG

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Packaging Corporation of America (NYSE:PKG) as a stock to potentially avoid with its 27.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

While the market has experienced earnings growth lately, Packaging Corporation of America's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Packaging Corporation of America

NYSE:PKG Price to Earnings Ratio vs Industry December 11th 2024
Keen to find out how analysts think Packaging Corporation of America's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Packaging Corporation of America would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 1.4% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 9.3% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 13% per year over the next three years. That's shaping up to be materially higher than the 11% per year growth forecast for the broader market.

In light of this, it's understandable that Packaging Corporation of America's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Packaging Corporation of America's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Packaging Corporation of America's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 1 warning sign for Packaging Corporation of America that you need to take into consideration.

Of course, you might also be able to find a better stock than Packaging Corporation of America. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.