Company Profile (excerpt from Reuters): Packaging Corporation of America (PCA), incorporated on January 25, 1999, is a producer of containerboard products and uncoated freesheet. The Company operates through three segments: Packaging, Paper, and Corporate and Other. The Packaging segment produces a range of corrugated packaging products. The Paper segment manufactures and sells a range of papers, including communication-based papers and pressure sensitive papers. As of December 31, 2016, the Company operated five containerboard mills, three paper mills and 94 corrugated products manufacturing plants.
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Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$10,633,221,383||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||2.30||Pass|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||208.75%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||18.45||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||4.84||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||2.30||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||2.29||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||13.57%|
|MG Value based on 3% Growth||$88.56|
|MG Value based on 0% Growth||$51.91|
|Market Implied Growth Rate||4.98%|
|% of Intrinsic Value||51.76%|
Packaging Corp Of America qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the high PB ratio. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $3.21 in 2014 to an estimated $6.11 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.98% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Packaging Corp Of America revealed the company was trading above its Graham Number of $61.36. The company pays a dividend of $2.52 per share, for a yield of 2.2%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 18.45, which was below the industry average of 24.6, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-22.41.
Packaging Corp Of America performs fairly well in the ModernGraham grading system, scoring a B+.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$22.41|
|Number of Consecutive Years of Dividend Growth||7|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||12/1/2017|
|Total Current Assets||$1,915,100,000|
|Total Current Liabilities||$832,700,000|
|Shares Outstanding (Diluted Average)||93,700,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$7.23|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$6.11|
Other ModernGraham posts about the company
None. This is the first time ModernGraham has covered the company.
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.