Packaging Corporation of America trades at $220.25 per share and has stayed right on track with the overall market, gaining 10.5% over the last six months. At the same time, the S&P 500 has returned 15.5%.

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Why Is Packaging Corporation of America Not Exciting?

We're cautious about Packaging Corporation of America. Here are three reasons there are better opportunities than PKG and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Packaging Corporation of America’s 5.2% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the industrials sector.

2. Low Gross Margin Reveals Weak Structural Profitability

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Packaging Corporation of America has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 22.7% gross margin over the last five years. That means Packaging Corporation of America paid its suppliers a lot of money ($77.29 for every $100 in revenue) to run its business.

3. Recent EPS Growth Below Our Standards

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Packaging Corporation of America’s EPS grew at a weak 1.1% compounded annual growth rate over the last two years, lower than its 3.7% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

Final Judgment

Packaging Corporation of America isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 20.5× forward P/E (or $220.25 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the most entrenched endpoint security platform on the market.

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