Packaging Corporation of America (NYSE:PKG) joined the long list of companies lowering earnings guidance due to a weaker economy. The company said that demand for its products were "significantly weaker" during the fourth quarter. While it may be tempting to jump on what some investors consider a defensive sector, things may continue to deteriorate before it gets better.
Packaging Corporation of America is a manufacturer of containerboard and corrugated products. Its products are used in many different applications, including transportation of manufactured goods, display boxes for use in retail operations, and specialty boxes for the meat and agricultural industries. In 2007, 46% of the company's corrugated products were sold into the food, beverage and agricultural markets.
The company's previous guidance for the fourth quarter was 35 cents a share. In early December 2008, the company did not give new guidance, but did say that earnings would be "below" the previous level. According to Thomson Financial Network, analysts reduced earnings expectations in the quarter to 25-28 cents a share. Investors should probably not have been surprised by the reduction in guidance, as economic growth has been decelerating the last few quarters. (Explore the controversies surrounding companies commenting on their forward-looking expectations, read Can Earnings Guidance Accurately Predict The Future?)
The company has already cut production by 90,000 tons during the last quarter of 2008. 50% of the production cutback occurred in November, with the remaining balance in December.
A Defensive Play
Investors generally see the packaging industry as a defensive industry that does better on a relative basis than other groups during a recession. During the last two recessions, the packaging stocks out performed the overall market, which included consumer staples. There are major differences between the various packaging companies; however, with Ball Corp. (NYSE:BLL) dominating the beverage can market, and Owens-Illinois (NYSE:OI) a leader in glass bottling.
Raw Material Relief
The packaging companies will also benefit from the fall in prices for commodities, as they are major consumers of plastic resin including polystyrene, and other types. Packaging Corp. in particular will benefit from the fall in energy prices since it uses extensive amounts of electricity to power its mills. In 2007, it purchased 18.3 million MMBTU's (million British thermal units) to run its facilities. Packaging Corp. diversified its generation source also, with Coal (44%), Oil (14%) and Natural gas providing (19%). Corrugated products are also shipped to the customer by railroad and truck, and the company should see reduced costs here as fuel surcharges instituted during the era of high oil gasoline prices are removed.
Other packaging companies have lowered guidance recently. Sonoco Products (NYSE:SON) reduced earnings guidance for the fourth quarter and full year 2008 due to "significantly slowing global economic conditions" and higher pension expenses. The company cut fourth quarter earnings to a range of 48-52 cents, from the previous 60-64 cents. Full year 2008 went to a range of $2.23-2.27 from the previous $2.36-2.40.
Packaging Corporation of America is a good way to play an eventual recovery in the economy, but judging by the speed of the contraction, and its unknown depth, investors should probably wait. Investing during an economic downturn simply means changing your focus.
Discover the benefits of defensive stocks, see Cyclical Versus Non-Cyclical Stocks.