Cardboard boxes may not be sexy, but the potential rewards of Packaging Corp of America (PKG) shares certainly are!
You see, shares of PKG rose significantly on October 21, climbing by more than 9.57% to close the day at $69.13.
Trading volume for the shares increased nearly fourfold with more than 4.5 million shares trading hands.
As you can see from the chart below, the day’s action pushed the mid-cap stock into positive territory year to date. The stock now shows an 8.93% gain against a negative 0.25% prior to October 21’s price spike.
The move has left many investors wondering about the catalyst for the sudden spike in the Lake Forest, Illinois manufacturer of containerboard and corrugated packaging products.
And here’s the answer…
Packaging Corporation announced its third-quarter results on Monday the 20th after the Closing Bell, and during its conference call, the company broadcast news that it has hired legal and financial advisers to explore converting itself to a master limited partnership (MLP).
This change could dramatically revalue PKG, as well as several other key containerboard stocks.
According to research analysts at Merrill Lynch, the containerboard companies, such as Packaging Corp of America, Rock-Tenn (RKT), and International Paper (IP), could experience upside potential of 20% to 30% through a MLP conversion.
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But hedge fund Perry Capital is even more bullish on the prospects of a conversion to master limited partnerships for the companies.
You see, by placing mills that produce containerboard from trees, wood chips, and other virgin input into highly tax-efficient MLPs, Perry argues the companies could generate cash to retire stock and boost dividends, which would in turn lift the value of the shares.
And according to their research, by converting to MLP’s, share prices of containerboard stocks could rise from 50% to nearly 100%.
Good News for Fundamental Investors, Too…
It’s important to understand that the MLP conversion isn’t the only reason to consider PKG for your portfolio.
The company’s fundamentals are also attractive, as evidenced by PKG’s revenue of $1.5 billion in the third quarter. This represents a 79.6% increase over the same period in 2013, which saw revenue of $845 million.
Net income for the quarter improved, as well, growing 23.2% to $104.4 million. This compares to the company’s net income of $84.7 million in third quarter 2013.
Shares are currently trading with a trailing P/E of 13.5x, while its PEG ratio is just 0.79.
Shares of PKG are easily one of the cheapest stocks in the industry, yet they still offer a respectable dividend yield of 2.6%.
During the third quarter, PKG’s corrugated product shipments were up by a third, thanks to its Boise acquisition. The company is now the fourth-largest producer of containerboard and corrugated packaging products in the U.S.
Ultimately, the company’s reasonable valuations provide support for near-term price levels, but more importantly, they provide a springboard to superior long-term capital appreciation.