TOP CONTRIBUTORS

Jonathan Sheets

Dan Pan

PKG AT A GLANCE

P/E ► 10.1 LOW EV/EBITDA ► 7.41 AVG ROA ► 11.4% HIGH ROE ► 26.7% AVG Debt to Equity ► 1.58 AVG Current Ratio ► 2.18 AVG Interest Coverage Ratio ► 7.63 HIGH

 

 

 

 

 

 

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]

The cost of fiber increased in 2007, with the price of recycled fiber increasing by 56%.^[3] However, 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.^[4][5]

Since the uses of containerboard is very broad, demand for PCA's products is influenced by general consumer spending, which has been stagnant.^[6] U.S. Environmental Legislation such as the Clean Air Act resulted in $19.4 million in costs in 2007.^[7] 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 Segment

PCA Cost per Ton of Container Board Production^[8][9][10]

PCA Corrugated Shipments^[11][12]

PCA Container Board Production^[13][14]

PCA manufactures containerboard and corrugated cardboard, which include shipping boxes, corrugated palettes, retail and produce packaging. ^[15] The company's gross margins have increased from 15% to 23% in the last three years.^[16]

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.^[17] 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.^[18] 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.^[19] 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.^[20]

PCA manufactured 2.45 million tons of containerboard and shipped 31.2 billion square feet of corrugated products in 2007.^[21] PCA sells most of its corrugated products within 150 miles of the mill they were produced at because of the high cost of shipping bulky corrugated cardboard orders.^[22] Two-thirds of the company's 9,600 customers are local and regional businesses while the rest are large national firms.^[23] Nearly all of PCA's customers are located within the United States.^[24]

Business Financials

Packaging Corporation of America Total Revenues, Operating Income and Net Income^[25]

PCA's revenues, operating income and net income increased between 2006 and 2007 due primarily to increases in the price of PCA's products.^[26] Between 2005 and 2006, revenues, operating income and net income increased due to higher prices and increased volume of all of PCA's products.^[27]

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. According to an USA today poll of economists in the U.S., Q1 and Q2 2008 consumer spending growth is expected to drop to almost 0%. ^[28] Partially as a result of the decrease in consumer spending, the total volume of corrugated products sold by PCA increased only 0.3% in 2007.^[29] Likewise, PCA's revenues grew only 6% between 2006 and 2007 compared to 10% between 2005 and 2006.^[30]

Environmental regulations force PCA to spend an extra $19.4 million in 2007

When the U.S. government passes new laws restricting PCA's output of pollutants, PCA is forced to pay for new equipment and processes that lower their pollution output. Of all the laws affecting PCA, the Resource Conservation and Recovery Act, Clean Water Act, Clean Air Act, The Emergency Planning and Community Right-to-Know-Act, Toxic Substance Control Act and the Safe Drinking Water Act are the six most important from a cost standpoint.^[31] In order to maintain compliance with these and other laws, PCA spent $19.4 million in 2007.^[32]

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. Between 2006 and 2007 the price per ton of the recycled fiber used by PCA increased 56%.^[33] However, PCA's flexibility of production that allows it to vary the mix of fibers is an advantage when raw material prices increase.^[34] For example, between Q1 2007 and Q1 2008 the price of recycled cardboard fiber increased 24% from $106 a ton to $131 a ton. PCA responded to this by using recycled fiber for only 16% of its total fiber usage. As a result, fiber costs increased by only $0.02 per share between Q1 2007 and Q1 2008.^[35]

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. According to the U.S. Energy Information Administration average diesel prices increased 57% between Q2 2007 and Q2 2008.^[36] 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.^[37] Higher transportation costs led to a $0.06 (14%) decrease in PCA's earnings per share between Q2 2007 and Q2 2008.^[38]

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 company's packaging products that compete with those produced by PCA represent only 22% of Weyerhaeuser's 2007 revenues. This means that 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.^[39][40]
• 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 that forced PCA to adjust its raw material usage in 2007. The company's packaging products compete with PCA's packaging products.^[41][42]
• Temple-Inland (TIN) manufactures corrugated packaging, lumber and building products. Unlike PCA, Temple-Inland's mills can only use certain types of wood fiber.^[43][44] For example, two of the company's six mills can only use recycled fiber.^[45] This exposes Temple-Inland to fluctuations in the price of recycled fiber.

Packaging Corporation of America and Key Competitors 2007 ($ in millions)

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: Risk Factors, pg 11
4. ↑ PKG 2007 10-K: Major Raw Materials Used, pg 7
5. ↑ Seeking Alpha: Packaging Corporation of America: Packing in the Profits
6. ↑ USA TODAY survey: We're in recession, economists say
7. ↑ PKG 2007 10-K: Environmental Matters, pg 9
8. ↑ PKG 2007 10-K: Consolidated Statements of Income, F-5
9. ↑ PKG 2007 10-K: Containerboard Production and Corrugated Shipments, pg 3
10. ↑ PKG 2006 10-K: Containerboard Production and Corrugated Shipments, pg 3
11. ↑ PKG 2007 10-K: Containerboard Production and Corrugated Shipments, pg 3
12. ↑ PKG 2006 10-K: Containerboard Production and Corrugated Shipments, pg 3
13. ↑ PKG 2007 10-K: Containerboard Production and Corrugated Shipments, pg 3
14. ↑ PKG 2006 10-K: Containerboard Production and Corrugated Shipments, pg 3
15. ↑ PKG 2007 10-K: PCA Operations and Products, pg 4-5
16. ↑ PKG 2007 10-K: Consolidated Statements of Income, F-5
17. ↑ PKG 2007 10-K: Major Raw Materials Used, pg 7
18. ↑ PKG 2007 10-K: Major Raw Materials Used, pg 7
19. ↑ PKG 2007 10-K: Major Raw Materials Used, pg 7
20. ↑ Seeking Alpha: Packaging Corporation of America: Packing in the Profits
21. ↑ PKG 2007 10-K: Containerboard Production and Corrugated Shipments, pg 3
22. ↑ PKG 2007 10-K: PCA Operations and Products, pg 6
23. ↑ PKG 2007 10-K: PCA Operations and Products, pg 6
24. ↑ PKG 2007 10-K: PCA Operations and Products, pg 10
25. ↑ PKG 2007 10-K: Consolidated Statements of Income, pg F-5
26. ↑ PKG 2007 10-K: Year Ended December 31, 2007 Compared to Year Ended December 31, 2006, pg 19
27. ↑ PKG 2007 10-K: Year Ended December 31, 2006 Compared to Year Ended December 31, 2005, pg 20
28. ↑ USA TODAY survey: We're in recession, economists say
29. ↑ PKG 2007 10-K: Year Ended December 31, 2007 Compared to Year Ended December 31, 2006, pg 19
30. ↑ PKG 2007 10-K: Consolidated Statements of Income, pg F-5
31. ↑ PKG 2007 10-K: Environmental Matters, pg 9
32. ↑ PKG 2007 10-K: Environmental Matters, pg 9
33. ↑ PKG 2007 10-K: Risk Factors, pg 11
34. ↑ PKG 2007 10-K: Risk Factors, pg 11
35. ↑ Packaging Corp. of America Q1 2008 Earnings Call Transcript, pg 2
36. ↑ Packaging Corp. of America Q2 2008 Earnings Call Transcript, pg 2
37. ↑ Packaging Corp. of America Q2 2008 Earnings Call Transcript, pg 2
38. ↑ Packaging Corp. of America Q2 2008 Earnings Call Transcript, pg 2
39. ↑ Google Finance: WY
40. ↑ Wikinvest: WY
41. ↑ Google Finance: SSCC
42. ↑ Wikinvest: SSCC
43. ↑ Google Finance: TIN
44. ↑ Wikinvest: TIN
45. ↑ TIN 207 10-K: Raw Materials, pg 3