Great Things Come in Small Packages

Packaging Corporation of America (NYSE: PKG  ) is a high-quality company operating in a typically boring industry, and therefore it often gets overlooked by many investors. As the fourth-largest manufacturer  of containerboard and corrugated packaging products in the United States, the company has recently positioned itself to lead industry rivals like International Paper Company  (NYSE: IP  ) and Rock-Tenn Company (NYSE: RKT  )  through aggressive revenue and earnings growth.

Industry-leading growth
Packaging Corp. of America is the fastest growing company in the 'Packaging and Containers' industry. The following is a breakdown of the company's projected growth rates for 2014 compared to competitors International Paper and Rock-Tenn: 

Company

International Paper

Packaging Corp..

Rock-Tenn

Revenue Growth 2014

1.6%

64.2%

4.1%

EPS Growth 2014

31.7%

37.35%

15.9%

The data above indicates that the industry as a whole is growing earnings per share quite well. Packaging Corp. is the clear leader, with an expected earnings-per-share growth rate of 37.35% in 2014.

However, only Packaging Corp. is projected to grow revenue next year at an above-average pace. The company's robust revenue growth rate of 64.2% leads both International Paper and Rock-Tenn by an incredibly wide margin.

What's driving the growth?
The success of Packaging Corp. is directly tied to the economy. When individual consumers and businesses ship more goods, there is more demand for the shipping products and related services that companies like Packaging Corp. provide. As the economy has battled back from recession in recent years and indicators like consumer sentiment and spending continue to steadily rise, companies in the packaging and containers industry should continue to benefit.

However, the economy does not account for the drastic differences in growth between Packaging Corp. and competitors like Rock-Tenn and International Paper. The reason for the former's aggressive growth is its most recent acquisition of smaller shipping container rival Boise for approximately $2 billion, which included Boise's $714 million debt burden.

The acquisition, which was announced in September, was immediately accretive to earnings and increased the company's containerboard production capacity by 42%. The deal made Packaging Corp. the fourth largest producer of containerboard products in the United States and significantly expanded the company's global footprint. 

Solid dividend history
In addition to aggressive revenue and earnings-per-share growth, Packaging Corp. has also excelled at increasing its dividend in recent years. In the last four years, the company has raised its dividend four times for a total increase of 166%. Packaging Corp.'s most recent dividend raise was in March of 2013, at which point management increased the company's quarterly cash dividend 28% from $0.31 to $0.40. 

Compared to competitors Rock-Tenn and International Paper, the company's dividend looks solid. Packaging Corp.'s dividend equals a yield of 2.60%, which is significantly better than Rock-tenn's yield of 1.5% and only slightly lower than International Paper's yield of 3.00%.

The one major negative is that the company did lower its dividend in 2009 significantly. This indicates that Packaging Corp. was hit especially hard in the financial crisis of 2008-2009 and its business may be especially susceptible to widespread economic woes in the future. 

Compelling valuation
One indicator that suggests Packaging Corp. is still being overlooked by many investors is the stock's relatively cheap valuation. The trailing 12-month P/E multiple for Packaging Corp. is 21.62 and the future 12-month P/E multiple is an even cheaper 14.08. 

These multiples are significantly more expensive than those of both Rock-Tenn and International Paper, whose forward multiples are 9.65 and 10.91 respectively. However, investors would be hard pressed to find many companies capable of increasing sales above 60% and EPS above 30% that still manage to trade below the multiples of the major indices. 

Ready to ship
The inherently utilitarian nature of Packaging Corp.'s business means that it will most likely continue to be overlooked by the majority of growth investors. However, all results indicate that it should not be, as the company is now better positioned for the future than it has ever been before.

The opportunistic acquisition of Boise has set Packaging Corp. up for tremendous revenue and EPS growth in 2014 and the acquisition should help management further expand into new geographic markets.

As long as the U.S. economy continues to strengthen, shares of Packaging Corp. look set to continue shipping profits to investors.

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