Morningstar | Packaging Corp. of America Maintains Solid Margins; Wallula Conversion on Track in 3Q
Packaging Corp. of America issued strong third-quarter earnings, as box and paper pricing continued to gain traction. Sales rose just over 2% versus the second quarter, and adjusted EBITDA climbed 6% to $406 million. Most of the improvement was driven by increased selling prices in PCA's paper segment, with marginal gains in packaging as the last of the box price increases flow through. After a brutal month for paper companies, PCA's shares have rebounded 7% and look somewhat overvalued, given our bearish outlook for the industry. With our long-term forecasts largely unchanged, our fair value estimate remains $79 per share, and our no-moat rating stands.Adjusted EBITDA Margins expanded slightly more than we had anticipated in PCA's paper segment following successful prices increases, ending up above 17%, 2% wider than in the second quarter. While higher prices are a near-term tailwind, we think paper demand will continue to fade. Conversions, such as the one taking place at Wallula, will gradually reduce developed market paper supply, leading to a flatter cost curve and lower margins.
Profitability remained strong in PCA's larger packaging segment, as well. Adjusted EBITDA margins ticked slightly higher to almost 25%, with any increases in wage or freight costs being offset by price pass-throughs on box prices. We expect segment volumes to continue climbing, as the newly converted Wallula machine ramps up production. As we've long written, we remain skeptical of the long-term sustainability of excess return on containerboard assets. In our view, these companies still produce commodity products, and excess return will be competed away by new entrants or the expansion of existing players.
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.
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