DA Davidson: Packaging Corp. Of America Is Best-In-Class

The recent market volatility has provided an attractive entry point for the shares of Packaging Corp Of America PKG, with the stock down 15 percent from a January high, according to DA Davidson.  

The Analyst

DA Davidson analyst Steven Chercover upgraded Packaging Corp. from Neutral to Buy with a $135 price target, suggesting 19-percent upside from current levels.

The Thesis

In its Jan. 30 earnings release,  Packaging Corp. of America cited rising freight and energy costs as headwinds into 2018,  Chercover said in a Monday note.

Inflation — a headwind to the containerboard industry — has worked in the favor of Packaging Corp., as it has led to the return of volatility and a downturn in equity values, the analyst said. 

Inflation is already discounted in the company's guidance, so DA Davidson's estimates are unchanged, Chercover said. Even if inflation exceeds expectations, the analyst said investors may seek exposure to low-cost operators like Packaging Corp. 

Packaging Corp. and other major companies in the sector have recently announced price hikes, presenting an upside risk, the analyst said. Any impact from the pricing initiative would come in the second half of the year, Chercover said. 

A solid economy, strong fundamentals and demand, low inventories and a secular shift to e-commerce are all tailwinds for corrugated box consumption, according to DA Davidson — making Packaging Corp. a buy on recent weakness. 

The Price Action

Packaging Corp. shares are up more than 23 percent over the past year, notwithstanding the nearly 4-percent pullback year-to-date.

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