Morningstar | Packaging Corp. Delivers a Solid 1Q, Though Containerboard Price Headwinds Loom
After an extended run of increasing prices and margins, conditions are starting to falter for major containerboard manufacturers. Industry box volumes declined during the first quarter of 2019, a significant change from the norm of 2%-3% growth over the past few years. Benchmark prices have also begun to falter, with medium prices falling in the fourth quarter and linerboard prices under pressure in the last few months. We think this is a consequence of both a steady supply of rising industry capacity and higher prices driving package conversion from boxes to envelopes and flexible solutions. Given that we have already been forecasting margin compression for Packaging Corp. of America, our $83 fair value estimate remains in place after the first quarter as does our no-moat rating.Packaging segment sales grew 5.3% versus last year following the Wallula conversion from paper to linerboard. This supported a 9% increase in containerboard volume versus the prior year, though that will slow as production laps last year's production ramp for new capacity. Given that benchmark prices for linerboard and medium are falling, we expect margin compression over the year. Among the largest containerboard companies, PCA's tilt toward virgin fiber as opposed to old corrugated containers, could amplify margin compression in 2019. While OCC prices have fallen considerably, pulp prices have come down quite a bit less.
After the conversion at Wallula, paper segment sales declined by around 9% versus the prior year, but profitability has remained solid. Adjusted EBITDA margins neared 23% in the quarter, due to a string of paper price increases throughout 2018. While we're still pessimistic about the long-term direction of paper volume and eventually prices, capacity closures like the one undertaken at Wallula by PCA can lead to periods of compelling margins like those seen recently. In the long run, investors should expect margins to gradually decline as demand drops.
Packaging Corporation of America is a producer of containerboard products and a producer of uncoated freesheet paper. The company's segments include: Packaging, which produces a variety of corrugated packaging products, including shipping containers, multi-color boxes and displays, and honeycomb protective packaging, as well as produces packaging for meat, fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products; Paper, which manufactures and sells papers, including both commodity and specialty papers; and Corporate and Other, which includes transportation assets, such as rail cars and trucks, to transport the company's products to and from its manufacturing sites.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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