StockStory Flags Weak Growth and Declining Returns for Packaging Corp

StockStory analysts advise caution regarding Packaging Corporation of America, citing underwhelming volume growth, weak earnings per share expansion, and declining returns on invested capital. The report identifies three specific factors that undermine confidence in the stock, suggesting investors seek alternative opportunities in the current market environment.

Packaging Corporation of America shares trade at $231.62. Over the last six months, the stock has returned 10.3%, while the S&P 500 index gained 12%. This performance indicates the shares have moved in lockstep with the broader market. The analysts state they do not have much confidence in the company's future trajectory, highlighting a lack of compelling investment thesis at current levels.

The first reason for caution involves revenue growth drivers. For industrial packaging companies, volume is considered the primary lifeblood because customer price tolerance has a ceiling. Packaging Corporation of America sold 1.42 million units in the latest quarter. Over the last two years, this volume averaged 5.9% year-on-year growth. The analysts describe this performance as underwhelming. They argue this suggests the company may need to lower prices or invest in product improvements to accelerate growth, actions that could hinder near-term profitability.

The second concern centers on earnings per share (EPS) trends. Long-term EPS changes indicate whether incremental sales are profitable, as revenue can be inflated by excessive spending on advertising and promotions. Packaging Corporation of America's EPS grew at a compounded annual rate of 2.9% over the last five years. This rate is lower than its 6.1% annualized revenue growth over the same period. The data indicates the company became less profitable on a per-share basis as it expanded its operations.

The third factor is the decline in return on invested capital (ROIC). ROIC measures operating profit relative to the capital raised through debt and equity. Over the last few years, Packaging Corporation of America's ROIC has decreased. While the analysts acknowledge they like what management has done in the past, they suggest these declining returns are a symptom of fewer profitable growth opportunities available to the firm.

Despite these fundamental concerns, the analysts characterize the current valuation as reasonable but do not see a significant opportunity at the moment. They express confidence that better stocks are available for purchase right now, specifically directing attention to software stocks they favor. The report concludes that Packaging Corporation of America's business quality falls short of their investment standards.