Packaging Corporation of America (NYSE: PKG) isn't a high-flying name; it doesn't have a robust outlook for growth, but it is a total package for buy-and-hold investors. The company is blue-chip quality, has a healthy balance sheet, established business, a clear outlook for earnings, and returns capital to shareholders. 

The company may not be counted on for regular, sustained annual increases, but that can be overlooked because of the distribution history. A history that has only seen distribution increases over the last 10 years, compounded by share repurchases. 

Share repurchases are a significant driver of results for Packaging Corporation of America. The company's share count fell 3.9% YOY by the end of Q3 2023 and is expected to continue falling, creating a longer lever for shareholder returns. 

Packaging  Corporation of America at a Turning Point 

Packaging Corporation of America had a decent quarter despite the YOY decline in top and bottom-line results. The 8.9% decline in revenue is slightly more than expected but offset by earnings strength. Revenue is down on reduced shipments compounded by lower pricing, which may persist into Q4. Still, the outlook for next year suggests the bottom for business is near. The company anticipates an increase in volume in 2024, with analysts forecasting a return to earnings growth by the 2nd half. 

The company experienced margin pressure, but its diversified nature and efforts to control costs softened the blow. Volume in both segments and price/mix in containerboard cut into results but were offset by price and mix in paper and lower operating expenses. The takeaway is that Q3 adjusted earnings are down compared to last year but came in well above consensus at $2.05. This is $0.12 above consensus and sufficient to keep the dividend distribution well-covered. 

The guidance includes an expectation for earnings softness in Q4. That softness includes increased spending as it restarts a production line at 1 of its mills intended to rebuild inventory. As it is, the company expects $1.76 per share vs the $2.35 it produced in the previous year. The bad news is that earnings are expected to fall; the good news is that Q4 should be the weakest quarter, and sequential earnings growth should begin in Q1 2024.

Valuation is a Near-Term Headwind 

The valuation for Packaging Corporation of America could be a headwind for share prices in the near term. The stock trades at roughly 17X its earnings outlook while packaging competitors like International Paper (NYSE: IP) and Amcor (NYSE: AMCR) trade at lesser 15X and 12X multiples. The discrepancy is meaningful because these stocks pay similar amounts of earnings as dividends, about 60%. In this light, Packaging Corporation of America stock may correct from current levels, but it will more likely move sideways within its new range until earnings grow into the valuation. That may come as early as 2024. 

The analysts' activity in PKG stock has been mixed this year, but the takeaways are favorable, if not bullish. The eight with ratings in 2023 lifted the consensus sentiment to Hold from Reduce, and the price target is up compared to last month, last quarter, and last year. The consensus implies the stock is fairly valued near $147.50, but most targets set in 2023 are above consensus and help put a floor in the market. 

The Technical Outlook: Packaging Corporation Consolidates in Range

Packaging Corporation of America's stock price increased following the Q3 release but is struggling to gain traction. The news was better than the previously reduced guidance, which makes the results as expected compared to the Q1 guidance. This may provide cause for volatility but is ultimately favorable to the market. The salient point is that normalization is ongoing, and a return to growth is in the forecast. Assuming the market can sustain support above the $143 level, it should continue consolidating within the $143 to $155 range. Assuming the current quarter results affirm the outlook, the stock could reach a new high in early 2024.