On Wednesday, Citi updated its outlook on Packaging (NYSE:PKG) Corp. of America (NYSE:PKG), increasing the price target to $199 from the previous $187, while maintaining a neutral rating on the stock. The adjustment follows Packaging Corp .'s robust performance, highlighted by a second-quarter beat driven by a 9% increase in volumes. The firm's July book-to-bill ratio, which rose by 12.5%, suggests a potential for record shipments in the third quarter.
Despite operating at full capacity during the second quarter, Packaging Corp. found its inventories below target levels at the start of July. This was attributed to stronger-than-anticipated demand from box customers, particularly those catering to consumer sectors.
Although the company's third-quarter guidance has been described as possibly conservative, particularly regarding price and cost assumptions, Citi forecasts a 9% year-over-year increase in third-quarter volumes, which implies shipments will remain flat quarter-over-quarter due to one fewer shipping day, aligning with Packaging Corp.'s guidance for slightly higher volumes.
The company has also revised its capital expenditure forecast for fiscal year 2024, increasing it by $200 million to a range of $670-690 million. This includes the construction of a new greenfield converting facility in Phoenix, expected to commence operations in early second quarter of 2025.
Citi notes that the visibility into a busy second half, continued market share gains, and the prospects for high-return capital expenditures are positive developments. However, these factors are believed to be already factored into the stock's price, which is currently trading at 11.2 times next twelve months' (NTM) EBITDA, compared to the 5-year average of 9.5 times.
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