Packaging Corporation of America (PKG): Buy, Sell, or Hold Post Q3 Earnings?

Packaging Corporation of America currently trades at $212.17 per share and has shown little upside over the past six months, posting a middling return of 4%. The stock also fell short of the S&P 500’s 10.5% gain during that period.

Is now the time to buy Packaging Corporation of America, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Packaging Corporation of America Not Exciting?

We're swiping left on Packaging Corporation of America for now. Here are three reasons we avoid PKG and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Packaging Corporation of America grew its sales at a tepid 5.7% compounded annual growth rate. This fell short of our benchmark for the industrials sector.

2. Low Gross Margin Reveals Weak Structural Profitability

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Packaging Corporation of America has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 22.8% gross margin over the last five years. Said differently, Packaging Corporation of America had to pay a chunky $77.24 to its suppliers for every $100 in revenue.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Packaging Corporation of America’s ROIC decreased by 3.9 percentage points annually over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Packaging Corporation of America’s business quality ultimately falls short of our standards. With its shares lagging the market recently, the stock trades at 19.5× forward P/E (or $212.17 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top digital advertising picks.

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