Over the past six months, Packaging Corporation of America has been a great trade, beating the S&P 500 by 12.5%. Its stock price has climbed to $238.06, representing a healthy 21.1% increase. This run-up might have investors contemplating their next move.
Is now the time to buy Packaging Corporation of America, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Packaging Corporation of America Not Exciting?
We’re glad investors have benefited from the price increase, but we're swiping left on Packaging Corporation of America for now. Here are three reasons you should be careful with PKG and a 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 1.41 million in the latest quarter, and over the last two years, averaged 6.9% year-on-year growth. This performance slightly lagged the sector 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 a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Analyzing the trend in its profitability, Packaging Corporation of America’s operating margin decreased by 3.7 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 12.3%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Packaging Corporation of America’s ROIC has decreased over the last few years. 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. With its shares topping the market in recent months, the stock trades at 22.1× forward P/E (or $238.06 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d recommend looking at the most entrenched endpoint security platform on the market.
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