Packaging Corporation of America trades at $232.33 and has moved in lockstep with the market. Its shares have returned 8.6% over the last six months while the S&P 500 has gained 9%.
Is there a buying opportunity in Packaging Corporation of America, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Packaging Corporation of America Not Exciting?
We don’t have much confidence in Packaging Corporation of America. Here are three reasons why there are better opportunities than PKG, plus one stock we’d rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Industrial Packaging company because there’s a ceiling to what customers will pay.
Packaging Corporation of America’s units sold came in at 1.4 million in the latest quarter, and over the last two years, averaged 3.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Looking at the trend in its profitability, Packaging Corporation of America’s operating margin decreased by 5.2 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 11.7%.
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).
Over the last few years, Packaging Corporation of America’s ROIC has unfortunately decreased. 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 isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 22.1× forward P/E (or $232.33 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re fairly confident there are better stocks to buy right now. Let us point you toward one of our top digital advertising picks.
Stocks We Would Buy Instead of Packaging Corporation of America
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