The company surpassed both its industry’s 3.5% growth and the S&P 500’s 27.1% rise in the past year. Credit: Trismegist san via Shutterstock.

Packaging Corporation of America (PCA) has experienced a notable surge in its shares, marking a remarkable 32.7% gain over the past year.

This growth outpaced both its industry’s average of 3.5% and the S&P 500’s 27.1% rise during the same period, according to data from Zacks Investment Research.

Factors behind price appreciation

Improvement in order levels

The Packaging segment of the company faced challenges in the first half of 2023, experiencing reduced sales and production volumes due to a drop in demand, leading customers to lower their inventories.

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However, a positive turn occurred in the third quarter of 2023 when the demand rebounded, and customer ordering patterns returned to normal levels.

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To balance containerboard production with demand, the company temporarily idled its Wallula, US-based containerboard mill and optimised its cost structure across the mill system.

The planned restart of the No. 3 machine at the Wallula mill in the fourth quarter aims to bring inventories to desired levels.

These measures are expected to result in less market-related downtime and higher shipments per day in the Packaging segment, contributing to favourable fourth-quarter results.

Increased e-commerce to aid growth

Despite ongoing weaknesses, PCA stands to benefit from the robust growth in e-commerce activities, which continues to drive packaging demand.

The Packaging segment, representing approximately 91% of the company’s revenues, plays a crucial role in distributing essential products such as food, beverages, pharmaceuticals, and consumer goods.

Stable packaging demand for various products is expected to support the segment’s performance in the upcoming quarters.

Acquisitions to boost growth

In December 2021, PCA acquired all assets of Advanced Packaging Corporation, including a 500,000ft² corrugated product facility in Grand Rapids, Michigan, US.

This strategic move aims to enhance the company’s containerboard portfolio through organic box volume growth and box plant acquisitions, ultimately increasing mill capacity and box plant operations.

Outlook and key picks

PCA remains a Zacks Rank #3 (Hold) company, and its future performance seems promising.

The company anticipates benefiting from increased e-commerce activities, demand recovery in its Packaging segment, and strategic acquisitions.

Investors looking for potential opportunities in the industrial products sector may consider other stocks such as Resideo Technologies (REZI), Applied Industrial Technologies (AIT), and A. O. Smith Corporation (AOS).

REZI currently holds a Zacks Rank #1 (Strong Buy) while AIT and AOS carry a Zacks Rank #2 (Buy).

These stocks present positive growth prospects, with strong earnings estimates and notable year-to-date share price gains.