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Packaging Corp Of America : The Cardboard Giant

08/20/2013 | 11:53am

NYSE
Paper Packaging

Packaging Corp of America (PCA) is a packaging giant, specialized in cardboard. Located near Chicago in Illinois, the American company has a long history in this traditional activity.
Its products are grouped into three different activities: packaging to protect and transport manufactured goods, boxes and multicolored displays with strong attractiveness for the goods in retail stores and finally boxes in the food and agriculture industry.
Its sales for 2012 totaled $2.8 billion compared to $2.6 billion in 2011 and $2.4 billion in 2010.

The particularity of PCA is its field of expertise (over 50 years). The group is not just a "box seller" as the president said.

Indeed, PCA is wishing to get closer to its customers by adding high quality services (requirements analysis). The group wants to be extremely reactive to client requests. "While you discover our products, we also learn how you conduct your business.", the board said.
Cooperation with customers is very important in the culture of the company.

The group is now worth 5 billion dollars, this exceptional growth over the past five years (x6) comes at a time of exploding trade and transport of goods coupled with a desire to achieve external growth.

Industry

The world market is huge with 300 billion dollars, and the United-States remains one of biggest market. However, the packaging business has many difficulties to expand worldwide, competitors produce especially for local customers. To expand its international business, it must go through the construction of a plant or take over a local actor.
The market is dominated by heavyweights like International Paper Company which realized 18 billion in sales (two-third), thanks to its the packaging segment. The second, Amcor, generates more than 12 billion in sales dedicated to the same activity.

Strength

- Skills and expertise of the company (50 years)
- Proximity to customers (needs analysis)
- Negotiating at the right price for supply (reputation of a powerful purchase department)
- Techniques and methodologies to meet the constraints of the product to be packaged
- Optimization of the manufacturing process to reduce costs (in 2012, net margin of 5.76% compared to 2.82% for the industry average)

Weaknesses

- High valuation level (P/E ratio of 18x for 2013 and 15.5x for 2014, 2 percentage points higher to the industry average)
- Stabilization of operating margin at 17%
- High Capex (6% of sales in 2013) so capital intensive (manufacturing plants, modernization of production lines...)

Opportunities

- Acquisitions and share repurchase in companies to expand its scope of application and range of customers, both in the U.S. and abroad
- The excellent ratio "net debt to EBITDA" allows him to set up this growth strategy
- Potential merger or acquisition by an industry major

Threats

- Price increase of commodities (oil, wood...)
- Slowing demand in consumption and distribution

Recent publications of the second quarter (16/07/2013)

- Revenue of 800 million dollars (surprise: +4%)
- An EBIT and net income that perform respectively +7% and +5.5% compared expectations
- A significant increase in EPS for the first six months at USD 1.28 vs USD 1.19 expected

Events to watch

- Publication of third quarter results in October 2013

Conclusion

"The package is not a waste, if you can easily recycle it, it becomes a commercial product" say industry players. In this sentence, the reputation of the container is as valuable and effective as the content.
This theme benefits to the sector obliged to rapidly satisfy customer needs for the management of new products whose packaging is part of the merchandising.

PCA meets these requirements and its experience in cost management gives it a real asset for an investor in the medium term.
In addition, the logical evolution of this industry, with the growth of commerce and trade, go through consolidations or acquisitions that may benefit to Packaging Corp. of America.

Based on an ideal price to set up a buying position (USD 52), and taking into account a theoretical valuation of USD 63, the potential is more than 20%.

This research note is part of the conviction buy list selected by the 4-traders equity research desk, based on fundamental and technical criteria. This stock is likely to be included in our North-American portfolio by the investing team. To be informed of our trades on this stock subscribe to one of our portfolios.




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Financial Ratios

Size 2014e 2015e
Capitalization 6 644 M$ -
Company Value 8 785 M$ 8 401 M$
Valuation 2014e 2015e
PER (Price / EPS) 14,5x 12,7x
Capitalization / Revenue 1,13x 1,07x
EV / Revenue 1,49x 1,36x
EV / EBITDA 7,65x 6,71x
Yield (DPS / Price) 2,64% 2,63%
Profitability 2014e 2015e
Operating Margin (EBIT / Sales) 13,8% 14,6%
operating Leverage (Delta EBIT / Delta Sales) 0,83x 2,27x
Net Margin (Net Profit / Revenue) 7,74% 8,42%
ROA (Net Profit / Asset) 10,5% 11,6%
ROE (Net Profit / Equities) 30,7% 34,9%
Rate of Dividend 38,3% 33,6%
Balance Sheet Analysis 2014e 2015e
CAPEX / Sales   6,33% 5,08%
Cash Flow / Sales (Taux d'autofinancement) 13,1% 13,4%
Capital Intensity (Assets / Sales) 0,74x 0,73x
Financial Leverage (Net Debt / EBITDA) 1,86x 1,40x
Income Statement Evolution
Packaging Corp Of America : Income Statement Evolution
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EPS Revisions
Packaging Corp Of America : EPS Revisions
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