Packaging Corporation of America (PKG)

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Packaging Corporation of America (NYSE: PKG) is the sixth largest producer of containerboard and corrugated products in the United States in terms of production capacity.^[1] PCA reports in only one segment and sells nearly all of its products within the United States.^[2]

Although fiber and recycled fiber is increasing in price, PCA's mills are able to use several types of fiber with little to no modification, and can easily switch between energy sources such as electricity, natural gas, oil, and coal. PCA's flexibility gives them an advantage over other corrugated products producers, many of whom are tied to certain raw materials by the machinery they use.^[3][4]

Since the uses of containerboard is very broad, demand for PCA's products is influenced by general consumer spending, which has been stagnant.^[5] The company competes with other producers of containerboard and corrugated packaging such as Weyerhaeuser Company (WY), Smurfit-Stone Container (SSCC) and Temple-Inland (TIN).

Business Overview

PCA manufactures containerboard and corrugated cardboard, which include shipping boxes, corrugated palettes, retail and produce packaging. ^[6] PCA's mills use machinery designed to produce corrugated products out of hardwood fiber, softwood fiber, recycled fiber or almost any combination of the three with little to no modification.^[7] Likewise, the company uses equipment that can switch between energy sources such as electricity, natural gas, oil and coal to produce steam to power its production lines.^[8] Because PCA can switch between raw materials with little cost or labor, they are able to purchase the mix of raw materials that results in the lowest possible manufacturing costs.^[9] PCA's flexibility gives them an advantage over other corrugated products producers, many of whom are tied to certain raw materials by the machinery they use.^[10]

Business & Financial Metrics^[11]

In 2009, PKG generated a net income of $265.9 million on $2.15 billion in total revenues. This represents a 96% increase in net income and a 9.0% decrease in total revenue from 2008, when the company earned $135.6 million on $2.36 billion in revenues.

Business Segments

PKG operates through only one segment. This single line of business is the integrated manufacture and sale of packaging materials, boxes, and containers for industrial and consumer markets.

Key Trends and Forces

Decreased consumer spending results in decreased volume growth for PCA

When spending on all goods decreases, there is less demand for packaging used to deliver goods safely resulting in lower revenues for PCA. On the other hand, when spending on all goods increases, so does demand for packaging and PCA's revenues.

PCA's flexibility in input materials is an advantage with higher raw materials prices

When the price of raw materials increases, PCA can either raise prices and risk lost sales or watch their margins shrink. However, PCA's flexibility of production that allows it to vary the mix of fibers is an advantage when raw material prices increase.^[12]

Rising diesel costs decrease PCA's earnings per share

When the price of diesel fuel rises, it costs PCA more to transport its products from its factories to its customers. The increase in diesel costs increased the cost of transporting raw materials to PCA's factories as well as transporting finished products to PCA's customers.^[13]

Key Competitors

• Weyerhaeuser Company (WY) produces wood products such as logs and lumber, paper pulp, and cardboard packaging. The company also manages and sells real-estate. The majority of the company's revenues come from their lumber and building products, which leaves them exposed not only to decreased consumer spending but to the decline in residential construction.^[14][15]
• Smurfit-Stone Container (SSCC) manufactures paper based packaging products and operates paper, plastic and aluminum recycling plants. The company's emphasis on recycled fiber makes them more susceptible to the increases in the cost of recycled fiber. The company's packaging products compete with PCA's packaging products.^[16][17]
• Temple-Inland (TIN) manufactures corrugated packaging, lumber and building products. Unlike PCA, Temple-Inland's mills can only use certain types of wood fiber.^[18][19] For example, two of the company's six mills can only use recycled fiber.^[20] This exposes Temple-Inland to fluctuations in the price of recycled fiber.

References

1. ↑ PKG 2007 10-K: Business, pg 3
2. ↑ PKG 2007 10-K: PCA Operations and Products, pg 10
3. ↑ PKG 2007 10-K: Major Raw Materials Used, pg 7
4. ↑ Seeking Alpha: Packaging Corporation of America: Packing in the Profits
5. ↑ USA TODAY survey: We're in recession, economists say
6. ↑ 2007 10-K: PCA Operations and Products, pg 4-5
7. ↑ PKG 2007 10-K: Major Raw Materials Used, pg 7
8. ↑ PKG 2007 10-K: Major Raw Materials Used, pg 7
9. ↑ PKG 2007 10-K: Major Raw Materials Used, pg 7
10. ↑ Seeking Alpha: Packaging Corporation of America: Packing in the Profits
11. ↑ PKG 2009 10-K pg. 15  
12. ↑ PKG 2007 10-K: Risk Factors, pg 11
13. ↑ Packaging Corp. of America Q2 2008 Earnings Call Transcript, pg 2
14. ↑ Google Finance: WY
15. ↑ Wikinvest: WY
16. ↑ Google Finance: SSCC
17. ↑ Wikinvest: SSCC
18. ↑ Google Finance: TIN
19. ↑ Wikinvest: TIN
20. ↑ TIN 207 10-K: Raw Materials, pg 3