Package Corp. of America: A get-ahead-of-the-pack play

Posted Jun 3rd 2009 12:00PM by Joseph Lazzaro
Filed under: Stocks to Buy

Just put the Packaging Corp. of America (NYSE: PKG) in the category of a get-ahead-of-the-pack play.

PKG is the fifth largest producer of containerboard and corrugated packaging products, including those proverbial corrugated boxes, and as one might sense, box demand declined with the recession: when you sell fewer things, you need fewer boxes in which to put those things.

Further, conditions will remain rough through much of FY2009, due to soft demand, lower prices for boxes, and unused capacity. The First Call FY2009/FY2010 EPS estimates for PKG are 60 cents to 62 cents.

Still, PKG's cost position remains better than its competitors and that fact, combined with a likely increase in demand in late FY2009 heading into FY2010, makes PKG a Buy at this price level – about $16-18 per share with a P/E of 13. Moreover, if additional 'green shoots' continue to appear regarding the U.S. economy, analysts' FY2010 EPS estimate of 62 cents could prove to be very conservative. In sum, the risk/return for PKG is favorable.

Stock Analysis: Packaging Corp. of America is a moderate-risk stock. Consider buying a 25% position in PKG now; then buy another 25% in three months, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your PKG position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $7.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: Packaging Corp. of America, PKG