EUR 850.00 For Business Accounts Only

Morningstar | PKG Updated Forecasts and Estimates from 08 Apr 2019

Packaging Corporation wrapped up a strong year, with full-year adjusted EBITDA of $1.5 billion, just beating our estimates. Stronger paper pricing and lower operating costs in its paper segment drove better-than-expected profits in the quarter, while the packaging segment results were consistent with our expectations for the year. Although we've slightly lifted our expectations for 2019 and 2020 to reflect a more gradual profitability decline for the company, we remain bearish on long-term margins in this cyclical business. To account for our improved medium-term outlook, our fair value estimate increases to $83 from $79 per share. Our no-moat rating is unchanged.

In 2019 and beyond, we see a gradual rebalancing of supply and demand, as relatively attractive margins have spurred numerous capacity expansion projects throughout North America. As supply increases, we think prevailing containerboard prices will more closely mimic the marginal cost of production, eroding margins for companies like Packaging Corp.

We've already seen early signs of this rebalance, with domestic corrugating medium prices dropping 3% in January, but we point to a decrease in linerboard and box prices as the bigger driver of future margins. Given the company's high level of integration between liner mills and box plants, the medium price decline will have little effect unless box prices fall--which we don't see as imminent. Additionally, we're skeptical of how much traction the announced 2019 paper price hike will receive, given that input costs (pulp) have begun to decline.