By Lawrence Rigby
Packaging Corp. of America stock plummeted after the company reported an 8.8 percent profit decline that triggered two downgrades.
The fall came despite the Lake Forest Ill.-based manufacturing company’s reporting a fourth quarter net income of $104.3 million, or $1.08 per share, beating analyst expectations of $1.03 per share.
The profit was a decline from $114.4 million, or $1.16 per share, in last year’s fourth quarter. Revenue during the fourth quarter fell to $1.39 billion, down 2.8 percent from $1.43 billion a year ago.
Citigroup and Macquarie downgraded the stock of the container-board and corrugated packaging maker on the news.
The stock closed at $49.70, down $7.47, or 12.9 percent. Packaging Corp. shares have decreased more than 20 percent since the beginning of the year, and more than 30 percent in the last 12 months.
In an explanation for downgrading the stock from buy to neutral, Citigroup pointed to previous periods of packaging price declines with list prices falling in a “disorganized fashion” for months. With profitability previously at high levels, falling prices could lead to margin erosion in the coming months, Citigroup said.
Macquarie downgraded the stock from neutral to underperform.
“We saw some decline we had expected that continued into the early part of November, but we saw a nice recovery which was sustained during the Thanksgiving holiday,” said Mark Kowlzan, chairman and CEO, on the company’s conference call.
The company said the 8 cents per share reduction in fourth-quarter earnings was driven primarily by lower white paper prices and higher annual mill outage costs. Lower corrugated volume, container-board production and export container-board prices also contributed to the earnings reduction.
North American demand for printing and writing paper declined by 5 percent in 2015, due to slow economic growth, competition from electronic media, and weak consumer spending. Packaging Corp. was also impacted by the strong dollar’s contributing to a 24 percent export drop for printing and writing paper producers.
“The levying of U.S. duties on freesheet copy-paper imports could tighten the market and lead to price increases in 2016. Major hurdles to higher prices are the strong dollar,” said Joshua Zaret, senior equity analyst at Longbow Research in a report.
The low end of the price range has faded, but pricing is still competitive, according to Zaret.
Packaging Corp. is coming off of some highly profitable years, with an operating margin of 12 percent in 2014, according to analysts.
“Despite being off on earnings by a couple percent, 2015 was a very strong year. We have a strong balance sheet and we’re poised for growth. We’re going to keep doing what we do,” said Kowlzan, the CEO, on the company’s earnings conference call.
Packaging Corp. reported full year profit of $436.8 million, or $4.47 per diluted share, and a total revenue of $5.74 billion. This was a 12.9 percent increase from a year ago when it reported profit of $386.9 million, or $3.99 per diluted share, and revenue of $5.9 billion.
