Packaging Corp. Q4 Falls Short As Industry M&A Heats

Packaging Corp. of America (NYSE:PKG) (PCA) stock sank as much as 10.4% in early trading Tuesday after the company posted a disappointing fourth quarter late Monday and guided first-quarter earnings below forecasts.

But PCA wasn't the only packaging company to see its shares take a hit Tuesday morning.

MeadWestvaco (NYSE:MWV) and Rock-Tenn (NYSE:RKT) soared Monday — by 14% and 6% respectively — after they announced a merger agreement.

On Tuesday, both gave back some gains — shares sank at the open — but the stocks trimmed their losses in morning trading. By early afternoon, Rock-Tenn was trading down about 2% from Monday's close, and MeadWestvaco about 1.5% down.

Their merger will form a leading global provider of consumer and corrugated packaging with combined sales of $15.7 billion.

"Obviously, the overall market is having a tough open today," Vertical Research Partners analyst Chip Dillon told IBD via email Tuesday, when he was asked about PCA's stock hit.

PCA said that excluding special items, fourth-quarter earnings rose 10% to $1.16 a share, below forecasts by analysts polled by Thomson Reuters for $1.17 a share. It was the company's fourth-straight quarterly decline in earnings growth vs. a year earlier.

Revenue increased 13% to $1.434 billion, below views for $1.485 billion and a major slowdown from the high double-digit pace of the prior four quarters. The company said that it expects first-quarter earnings in the range of $1.07 to $1.10 per share.

"The stock is down because they guided down the first-quarter EPS," said Dillon, who has a buy rating on the stock. "Much of this is seasonal (higher costs in the first quarter). In the 1Q, you get hit with higher energy use (to heat the mills/plants) as well as higher wood and chemical costs versus the rest of the year. The timing of some labor costs also hits hardest in the 1Q versus other quarters."

PCA had done a major buyout of its own in October 2013. It paid $2.1 billion, including the fair value of assumed debt, for paper and packaging products maker Boise. The buy has given PCA a lift in revenue and profit and has generated cost synergies.

The slowdown in fourth-quarter earnings growth vs. a year earlier comes amid tough comparisons.

The fourth quarter of 2013 was the first quarter when it owned Boise and had the beginnings of synergies from the buy, said Dillon a few days before PCA's fourth-quarter report.