Time after time, investors who do a little extra work to identify those companies in commodity industries that do things a little better, see long-term rewards. It was true years ago in steel, when Nucor (NYSE:NUE) pioneered a new model, and it's true, at least to some extent, in containerboard (boxes) with Packaging Corp (NYSE:PKG).

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A Good End to the Year, Relatively Speaking
At first glance, Packaging Corp's earnings aren't going to look all that great. Revenue rose just 4% on a 0.2% increase in containerboard production and 7% increase in box shipments. Given that industry prices were not very strong in the second half of the year, that was a pretty good result for Packaging Corp and a little better than the Street was expecting.

Profitability was not very good, but it wasn't expected to be and the company actually did better than analysts expected. Gross margin was flat on a sequential basis, but slipped three points from last year on higher input costs. Operating income was down 20% on modest increases in internal spending. (For related reading, see Zooming In On Net Operating Income.)

Stronger Shipments and Improving Profits?
Packaging Corp management was pretty optimistic about the near-term outlook for containerboard shipments, even though there are the much-discussed issues in Europe weighing on the global market. The good news for this company is that a lot of its demand comes from economically-insensitive markets like food and beverage. Likewise, the company benefits from its focus on higher-margin specialty products and its exceptional time to market, factors that mitigate what goes on in the larger global commodity market.

Packaging Corp also has some cost improvements coming online. While the company acknowledged upcoming cost increases from weather and maintenance, 2012 as a whole should see some tailwinds as new, more energy-efficient facilities start contributing. Remember too that Packaging Corp already has some of the lowest-cost mills in the industry and quite a bit of flexibility, when it comes to inputs like fiber.

Content to Play a Strong Hand
While Packaging Corp's competitors, like Rock-Tenn (NYSE:RKT) and International Paper (NYSE:IP), integrate major deals (SSSC for Rock-Tenn, Temple Inland (NYSE:TIN) for IP), the company seems relatively content to not make sweeping deals.

Frankly, this makes complete sense. The company has a strong business in specialty/regional markets and industry-leading low-cost facilities. What are the odds, then, that a major deal is going to significantly improve that portfolio? While there are likely to be small rivals/mills here and there that Packaging Corp can add and improve, sweeping deals don't seem to fit with this model.

Packaging Corp and Meadwestvaco (NYSE:MWV) are unusual in that they use quite little recycled containerboard as inputs when compared to the likes of Graphic Packaging (NYSE:GPK) or International Paper. Instead they use more virgin fiber, and with the housing market as weak as it is and China scooping up a lot of recycled containerboard, virgin fiber prices are low and quite appealing as an input.

The Bottom Line
Packaging Corp is a fine company, but perhaps not the best stock in and of itself, today. True, the company seems undervalued relative to its industry peers, but both free cash flow and forward EBITDA models suggest a fair value in the high $20s. That sets up one of those confounding trade-offs of "quite cheap on a relative sense" versus "not so cheap on an absolute basis." (For related reading on EBITDA, see EBITDA: Challenging The Calculation.)

That's arguably room enough for existing investors to hold on, but it's not the most compelling discount for new investors. Still, with management feeling good about the business, investors may want to keep on eye on this, should the stock get cheaper.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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