Packaging Corp. of America is undervalued

Posted Dec 7th 2009 3:10PM by Joseph Lazzaro
Filed under: Stocks to Buy

Packaging Corp. of America (PKG) is rising on schedule, which is why I'm reiterating my buy rating for the company's shares, first recommended on June 3, 2009 at a price of $16.55. If you bought PKG in June, you're up about 30%.

Back in June, the calculation was made that a lack of capacity in the containerboard industry, due to recession cut-backs, would benefit Packaging Corp., and so far the calculation is on the mark. The containerboard market should rebound nicely in 2010, leading to a 4-7% revenue increase for PKG, after a likely 10% decline in 2009.

Further, prices should improve slightly, and when they do, that will probably convince those institutional investors (IIs) who haven't already committed to PKG to do so, leading to another stock surge higher. Look for PKG to trade above $30 in 2010.

The First Call FY2009/FY2010 EPS estimates for PKG are 91 cents to $1.05. That FY2010 EPS estimate will likely prove to be low.

Technically, Packaging Corp.'s stock chart is strong – an uptrend, but with above-average volatility. The volatility should lessen in 2010 as additional evidence confirms a sustained U.S./global economic recovery. Further, although PKG is vulnerable to year-end profit-taking by selected IIs, so far that hasn't occurred, which is remarkable, given that PKG traded below $10 earlier in 2009.

Stock Analysis: Packaging Corp. of America is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 50% position in PKG now; then buy another 25% in one month, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your PKG position before February 2010. 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.

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