America’s fourth largest producer of containerboard and packaging products, Packaging Corporation of America PKG is scheduled to report third-quarter 2016 results after the market closes on Oct 19. In the last reported quarter, the company’s earnings comfortably beat the Zacks Consensus Estimate by 7 cents. Packaging Corporation’s earnings track record has been decent, beating estimates in three of the four trailing quarters, posting an average beat of 4.59%.
Let's see how things are shaping up for the upcoming third-quarter results.
Key Factors in the Third Quarter
During the quarter, Packaging Corporation completed the acquisition of TimBar Corporation for $386 million, in cash. The acquisition is likely to be accretive with immediate effect. The company expects this acquisition to increase its containerboard integration by over 200,000 tons or 6% from its current level of 87%. The transaction will also allow for further optimization and enhancement of its mill capacity.
Subsequent to the quarter, the company entered into a definitive agreement to acquire Columbus Container, Inc., an independent corrugated products producer, for $100 million. The deal is likely to be closed by the fourth quarter of 2016. The acquisition is expected to increase containerboard production by over 30,000 tons. Although the transaction is likely to have minimal effect on the upcoming quarterly results, it is likely to attract favorable contracts for the company and augment its revenues, strengthening its leading position in the market.
Despite stiff competition from other alternative product categories, industry-wide corrugated product shipments increased 2.2% year over year during the second quarter of 2016. The company expects seasonally higher volumes for containerboard and corrugated products and lower energy costs in the to-be-reported quarter’s results. Being one of the leading producers of containerboard and corrugated products in the country, Packaging Corporation is likely to benefit from the modest growth dynamics of the industry. Paper prices are expected to move higher reflecting continued realization of the announced price increases, while annual outage costs are expected to be lower.
Our proven model conclusively shows that Packaging Corporationis likely to beat earnings this quarter as it possesses the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is perfectly the case here as you will see below:
Zacks ESP:Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently +0.76%.
Zacks Rank:Packaging Corporation’s Zacks Rank #2 when combined with a positive ESP makes earnings beat likely this quarter.
Note that we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into an earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are some other companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Amazon.com, Inc. AMZN, with an Earnings ESP of +6.98% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Johnson & Johnson JNJ with an Earnings ESP of +4.24% and a Zacks Rank #3.
FMC Technologies, Inc. FTI, with an Earnings ESP of +21.74% and a Zacks Rank #3.
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