Packaging Corp. Earnings: Moderating Containerboard Demand Raises Near-Term Uncertainty

Packaging Corp. of America PKG reported underwhelming first-quarter results as a favorable mix in packaging was more than offset by a double-digit decline in volume. The packaging business continues to struggle as consumer spending slows amid heighted economic uncertainty. That said, Packaging Corp.’s small paper business posted strong results for the quarter, benefiting from its previously announced price increases and a much smaller decline in volume. Despite cost management initiatives, rising operating costs continued to weigh on the firm, with consolidated operating margins contracting 300 basis points from a year ago to 13.7%. We expect some improvement in operating costs during the year, but Packaging Corp faces an uphill battle as demand remains constrained. We’ve decreased our fair value estimate to $108 per share from $110 due to a decrease in our near-term revenue and profitability forecast.

The packaging segment reported an 8% decrease in revenue year over year as corrugated shipments per day fell almost 13%. This was largely due to a shift in consumer spending toward services and additional inventory destocking that began at the end of 2022. The segment reported a 14.8% operating margin, a 360-basis-point decline from a year ago as domestic and export containerboard prices pushed lower. Management noted that they anticipate improvement in packaging volumes in the second quarter, but we expect containerboard prices to remain pressured through the end of the year.

Packaging Corp.’s paper business continues to post strong results, with revenue falling roughly 1.5% year over year but segment operating margins expanding to 22.6%. This is an 800-basis-point increase year over year and 180 basis points sequentially as the firm captures the full effect of its previously announced price increase. While we don’t expect a robust paper market to last forever, the gains in the paper business should provide a near-term cushion from weakness in the packaging segment.