Student Managed Investment Fund
USF Student Managed Investment Fund January 22, 2021
Packaging Corporation of America NYSE: PKG
Time to ship this box out: valuations too flamboyant for a packaging company The stars have aligned perfectly to exit our multiyear position in PKG. Originally bought at about $67/share, the Company grew market share and operations rapidly after its 2013 acquisition of Boise Paper. Shares rallied until 2017 but have stagnated since. We currently find little change in the short to medium term story as compared to the previous three years and expected shares to recover to preCOVID-19 levels in the coming 12 months. However, valuations have skyrocketed to levels that are nice for returns, but are fundamentally not justifiable.
COVID-19 and a heavy shift towards digitalization has driven significantly lower demand for industrial packaging and a bleak outlook for printing paper. While 3Q20 results held up decently well and increased e-commerce activity may provide longterm tailwinds, we’d feel more comfortable taking our gains here and putting cash into stocks with more attractive valuations and/or growth profiles. Price Performance Since Purchase (3/20/14) $160
$140 $125 Original PT (2016)
$120
$100
$80
$60
$40
SELL Price as of 1/21/21 close: $140.55 Intrinsic Value: $107 Anton Ashrafyan aashrafyan@usf.edu Skylar Cantone grace22@usf.edu Timothy Henning thenning@usf.edu Tyler Schulman tschulman1@usf.edu
Company Overview Packaging Corporation of America (“PKG” or “the company”) is the 3rd largest producer of containerboard products and the 3rd largest producer of uncoated freesheet in North America. PKG operates through two major segments: packaging and paper. The Company is headquartered in Lake Forest, Illinois and was founded in 1867. Price Target & Risks Our $107 intrinsic value is based on Street case revenue assumptions and an average between our perpetuity growth and exit EBITDA multiple DCF approaches. Factors that could result in overperformance include 1) a favorable supply environment that yields better than expected pricing for corrugated products, 2) decreased raw materials pricing 3) stronger than expected demand for corrugated and paper products.
Valuation Discounted Cash Flow Model USD mm expect per share data
Revenue % Δ YoY
EBITDA (-) taxes (+/-) working capital changes (-) capex Unlevered FCF Unlevered FCF yield
Date of Analysis Stub adjustment Discount factor PV of cash flows
FY21
FY22
FY23
FY24
FY25
6,998.1
7,138.1
7,280.8
7,426.4
7,575.0
5.0%
2.0%
2.0%
2.0%
2.0%
1,364.4 (291.0) (58.8) (412.8) 601.8
1,430.6 (316.4) (23.9) (437.5) 652.8
1,505.1 (347.5) (24.6) (458.0) 675.0
1,612.3 (391.1) (27.0) (443.9) 750.3
1,613.4 (404.8) (21.5) (456.4) 730.7
8.6%
9.1%
9.3%
10.1%
9.6%
0.94 308.8
1.94 186.6
2.94 101.3
3.94 59.1
4.94 30.2
01/22/21 94.2%
Cost of Equity Calculation Normalized Rf rate
(1)
Equity risk premium (1) Unlevered b Cost of Equity Enterprise Value Calculation Share price Shares outstanding (diluted) Total debt (2) Cash & marketable securities Enterprise Value
WACC Calculation 2.5%
Cost of debt
5.5% 0.93 7.6%
Corporate tax rate After tax cost of debt Debt Weight Equity Weight WACC
$141 94.5 2,478.7 1,095.5 14,665.18
Perpetuity growth rate Stable cash flows Terminal Value PV of terminal value PV of 5yr UFCFs Net debt DCF Implied Equity Value Shares outstanding (diluted) Implied Value Per Share
2.0% 730.7 14,413.8 10,236.6 685.9 1,383.2 9,539.3 94.5 $101
Terminal year EBITDA EBITDA multiple Terminal Value PV of terminal value PV of 5yr UFCFs Net debt DCF Implied Equity Value Shares outstanding (diluted) Implied Value Per Share
1,613.4 10.0x 16,133.5 11,457.9 685.9 1,383.2 10,760.6 94.5 $114
1/22/2020
3.8% 21.0% 3.0% 9.4% 90.6% 7.2%
Notes (1) Provided by Duff & Phelps (2) Excludes operating leases
WACC 100.94 6.5% 7.0% 7.5% 8.0%
1.0% $97 $86 $77 $69
WACC 113.87 6.5% 7.0% 7.5% 8.0%
7.5x $86 $84 $82 $80
Perpetuity Growth 2.0% 3.0% $121 $159 $106 $135 $93 $116 $82 $101
EBITDA Multiple 10.0x $118 $115 $112 $109
12.0x $143 $139 $136 $133
2
Income Statement USD mm expect per share data Fiscal Year Ended December 31st
FY15A
Revenue YoY growth
COGS SG&A Special items / other Total Operating Expenses
FY16A
FY17A
FY18A
FY19A
FY20E
FY21E
FY22E
FY23E
Base FY24E
FY25E
5,741.7
5,779.0
6,444.9
7,014.6
6,964.3
6,664.9
6,998.1
7,138.1
7,280.8
7,426.4
7,575.0
–
0.6%
11.5%
8.8%
(0.7%)
(4.3%)
5.0%
2.0%
2.0%
2.0%
2.0%
(5,369.3) (536.4) (41.2) (5,946.9)
(5,320.3) (557.6) (32.7) (5,910.6)
(5,267.3) (547.0) (102.2) (5,916.4)
(4,533.7) (451.3) (6.7) (4,991.7)
Operating Income
(4,503.3) (471.1) (24.3) (4,998.7)
(4,974.1) (519.9) (18.4) (5,512.4)
(5,458.5) (559.8) (28.5) (6,046.9)
(5,532.0) (549.6) (30.6) (6,112.2)
(5,606.2) (538.8) (31.7) (6,176.7)
(5,644.1) (538.4) (32.2) (6,214.7)
(5,757.0) (549.2) (31.9) (6,338.1)
750.0
780.3
932.5
1,067.7
1,053.7
748.4
951.2
1,025.8
1,104.2
1,211.8
1,236.9
13.1%
13.5%
14.5%
15.2%
15.1%
11.2%
13.6%
14.4%
15.2%
16.3%
16.3%
(85.5) – 664.5
(91.8) – 688.5
(102.6) (1.3) 828.6
(95.1) (2.1) 970.5
(128.8) (7.9) 917.0
(93.4) 2.4 657.5
(93.3) (2.0) 855.9
(93.3) (2.0) 930.5
(80.2) (2.0) 1,022.0
(59.4) (2.0) 1,150.3
(44.4) (2.0) 1,190.5
(227.7) (5.2) 431.6
(238.9) (4.4) 445.2
(160.0) (5.6) 663.0
(232.5) (5.7) 732.3
(220.6) (5.2) 691.2
(177.4) (3.7) 476.3
(291.0) (5.0) 559.9
(316.4) (5.0) 609.1
(347.5) (5.0) 669.5
(391.1) (5.0) 754.2
(404.8) (5.0) 780.7
Basic EPS Basic shares outstanding Diluted EPS Diluted shares outstanding
$4.47 96.6 $4.46 96.7
$4.76 93.5 $4.75 93.7
$7.09 93.5 $7.07 93.8
$7.82 93.7 $7.80 93.9
$7.36 93.8 $7.34 94.1
$5.06 94.1 $5.04 94.4
$5.94 94.2 $5.92 94.5
$6.47 94.2 $6.44 94.5
$7.09 94.4 $7.07 94.8
$7.97 94.6 $7.94 95.0
$8.23 94.8 $8.20 95.2
EBIT Depreciation and amortization Special items / other EBITDA
750.0 356.5 6.7 1,113.2
780.3 358.0 24.3 1,162.6
932.5 391.4 18.4 1,342.3
1,067.7 410.9 41.2 1,519.8
1,053.7 387.5 32.7 1,473.9
748.4 400.3 102.2 1,250.9
951.2 384.6 28.5 1,364.4
1,025.8 374.1 30.6 1,430.6
1,104.2 369.3 31.7 1,505.1
1,211.8 368.4 32.2 1,612.3
1,236.9 344.5 31.9 1,613.4
19.4%
20.1%
20.8%
21.7%
21.2%
18.8%
19.5%
20.0%
20.7%
21.7%
21.3%
79.0% 7.9% 34.3%
77.9% 8.2% 34.7%
77.2% 8.1% 19.3%
76.5% 7.6% 24.0%
76.4% 8.0% 24.1%
79.0% 8.2% 27.0%
78.0% 8.0% 34.0%
77.5% 7.7% 34.0%
77.0% 7.4% 34.0%
76.0% 7.3% 34.0%
76.0% 7.3% 34.0%
Operating margin
Interest expense Other income (expenses) EBT Taxes Earnings allocated to participating securities Net Income
EBITDA margin
Drivers Cost of sales margin SG&A margin Tax rate
01/22/2021
Active Operating Case:
3
Quarterly Income Statement USD mm expect per share data Fiscal Year Ended December 31
st
1Q19A
Revenue YoY growth
COGS SG&A Special items / other Total Operating Expenses Operating Income
2Q19A
3Q19A
4Q19A
1Q20A
2Q20A
3Q20A
4Q20E
Base LTM 3Q20
1,733.7 –
1,759.9 –
1,750.7 –
1,720.0 –
1,708.7
1,541.6
1,693.7
1,720.9
6,664.0
(1.4%)
(12.4%)
(3.3%)
0.1%
–
(1,312.3) (140.0) (6.0) (1,458.3)
(1,332.0) (143.7) (3.8) (1,479.5)
(1,339.3) (136.9) (11.7) (1,487.9)
(1,336.7) (137.0) (11.2) (1,484.9)
(1,343.7) (145.9) (10.0) (1,499.6)
(1,215.8) (136.3) (73.4) (1,425.5)
(1,348.3) (127.1) (8.8) (1,484.2)
(1,359.5) (137.7) (10.0) (1,507.1)
(5,244.5) (546.3) (103.4) (5,894.2)
275.4
280.4
262.8
235.1
209.1
116.1
209.5
213.7
769.8
15.9%
15.9%
15.0%
13.7%
12.2%
7.5%
12.4%
12.4%
11.6%
Interest expense Other EBT
(24.1) (2.0) 249.3
(22.4) (2.0) 256.0
(21.6) (1.9) 239.3
(60.7) (2.0) 172.4
(19.6) 0.6 190.1
(25.1) 0.6 91.6
(24.4) 0.6 185.7
(24.3) 0.6 190.1
(129.8) (0.2) 639.8
Taxes Earnings allocated to participating securities Net Income
(62.5) (1.4) 185.4
(62.4) (1.5) 192.1
(59.5) (1.3) 178.5
(36.2) (1.0) 135.2
(48.4) (1.2) 140.5
(34.9) (0.5) 56.2
(46.6) (1.0) 138.1
(47.5) (1.0) 141.5
(166.1) (3.7) 470.0
Basic EPS Basic shares outstanding Diluted EPS Diluted shares outstanding
$1.98 93.7 $1.97 94.0
$2.05 93.8 $2.04 94.0
$1.90 93.9 $1.89 94.3
$1.44 93.9 $1.43 94.3
$1.50 93.9 $1.49 94.3
$0.60 94.0 $0.59 94.4
$1.47 94.2 $1.46 94.5
$1.50 94.2 $1.50 94.5
$5.00 94.0 $4.98 94.4
EBIT Depreciation and amortization Special items / other EBITDA
275.4 94.8 6.0 376.2
280.4 95.8 3.8 380.0
262.8 97.9 11.7 372.4
235.1 98.9 11.2 345.2
209.1 100.3 10.0 319.4
116.1 108.3 73.4 297.8
209.5 100.4 8.8 318.7
213.7 91.3 10.0 315.0
769.80 407.9 103.4 1,281.1
21.7%
21.6%
21.3%
20.1%
18.7%
19.3%
18.8%
18.3%
19.2%
75.7% 8.1% 25.1%
75.7% 8.2% 24.4%
76.5% 7.8% 24.9%
77.7% 8.0% 21.0%
78.6% 8.5% 25.5%
78.9% 8.8% 38.1%
79.6% 7.5% 25.1%
79.0% 8.0% 25.0%
78.7% 8.2% 26.0%
Operating margin
EBITDA margin
Drivers Cost of sales SG&A Tax rate
01/22/2021
Active Operating Case:
4
Cash Flow Statement USD mm expect per share data Fiscal Year Ended December 31st
FY15A
FY16A
FY17A
FY18A
FY19A
FY20E
FY21E
FY22E
FY23E
FY24E
FY25E
1Q20A
2Q20A
3Q20A
Net income D&A SBC Impairments Deferred income taxes Other Change in operating assets and liabilities Accounts receivables Inventories Prepaid expenses and other current assets Accounts payable Accrued liabilities Income tax payable / receivable Change in Working Capital Cash from Operating Activities
436.8 356.5 18.2 – 1.7 19.2
449.6 358.0 19.7 – (4.0) (21.3)
668.6 391.4 20.6 13.5 (84.5) (7.4)
738.0 410.9 23.5 3.1 38.7 18.8
696.4 387.5 30.4 – 60.3 23.5
476.30 400.28 30.43 – (14.62) (38.22)
559.89 384.63 31.10 – 16.27 (14.38)
609.13 374.14 31.44 – 6.84 (48.68)
669.52 369.26 31.77 – 6.97 (50.12)
754.20 368.36 31.96 – 7.11 (43.66)
780.73 344.55 32.60 – 7.25 (37.65)
141.7 100.3 10.1 – 13.5 7.1
56.6 108.2 7.7 55.2 5.7 9.5
139.1 100.5 6.0 – 1.9 (59.9)
9.5 (11.9) 4.1 (37.3) (15.5) (18.70) (69.8) 762.6
(3.6) (25.7) – 16.6 (3.2) 15.10 (0.8) 801.2
(115.1) (21.0) (5.2) 41.0 8.4 (54.20) (146.1) 856.1
(56.1) (35.6) (2.1) (17.6) 5.5 53.0 (52.9) 1,180.1
56.4 1.4 (6.9) (32.40) (0.10) (9.1) 9.3 1,207.4
61.50 33.43 8.14 70.70 (11.26)
(39.21) (38.03) (1.83) 9.32 11.00
(16.47) (15.97) (0.77) 4.67 4.62
(16.80) (16.29) (0.79) 4.60 4.71
(17.13) (16.62) (0.80) 2.72 4.81
(17.47) (16.95) (0.82) 8.81 4.90
(58.8) 918.8
(23.9) 948.9
(24.6) 1,002.8
(27.0) 1,090.9
(21.5) 1,106.0
(34.0) (15.7) (23.0) 28.5 (22.0) 30.2 (36.0) 236.7
62.3 (24.7) 8.1 (66.3) 14.3 (9.8) (16.1) 226.8
(47.3) 56.9 9.3 31.6 36.7 23.4 110.6 298.2
Capital expenditures Sale of PP&E Sales (purchases) of marketable securities Other Cash from Investing Activities
(314.5) – – 16.4 (298.1)
(274.3) – – (495.3) (769.6)
(343.0) 16.6 – (282.7) (609.1)
(551.4) 1.5 – (58.3) (608.2)
(399.5) 4.1 (146.1) (5.1) (546.6)
(388.5) 4.4 – – (384.1)
(412.8) 6.7 – – (406.2)
(437.5) 4.2 – – (433.4)
(458.0) 4.8 – – (453.2)
(443.9) 5.0 – – (438.9)
(456.4) 5.2 – – (451.2)
(70.5) 0.1 (3.9) (2.7) (77.0)
(80.7) 4.2 27.1 (2.4) (51.8)
(102.3) 0.1 (23.8) (1.1) (127.1)
Proceeds from issuance of long- term debt Principal payments on long- term debt Share repurchases Dividends paid Other Cash from Financing Activities
– (47.6) (154.7) (200.8) (2.1) (405.2)
385.0 (37.5) (100.3) (216.1) (7.6) 23.5
997.8 (1,011.9) – (237.6) (17.7) (269.4)
– (151.3) – (268.1) (7.9) (427.3)
895.8 (923.4) – (298.7) (16.5) (342.8)
– (1.1) – (318.8) – (319.9)
– – – (376.8) – (376.8)
– – – (376.8) – (376.8)
– (699.2) – (377.6) – (1,076.8)
– (399.4) – (378.5) – (777.9)
– (399.4) – (379.4) – (778.8)
– (0.4) – – – (0.4)
– (0.4) – (149.7) (10.4) (160.5)
– (0.3) – (74.9) (0.1) (75.3)
59.3 124.9 184.2
55.1 184.2 239.3
144.6 216.9 361.5
318.0 361.5 679.5
312.7 679.5 992.2
(527.2) 1,266.9 739.7
(125.8) 739.7 613.9
(124.0) 613.9 489.9
14.5 838.8 853.3
95.8 853.3 949.1
Increase (decrease) in cash & cash equivalents Cash & cash equivalents at the beginning of the period Cash & cash equivalents at the end of the period
01/22/2021
(22.4) 239.3 216.9
162.5 1,016.7
135.8 992.2 1,128.0
138.8 1,128.0 1,266.9
159.3 679.5 838.8
5
Balance Sheet USD mm expect per share data Fiscal Year Ended December 31st
FY15A
FY16A
FY17A
FY18A
FY19A
FY20E
FY21E
FY22E
FY23E
FY24E
FY25E
1Q20A
2Q20A
3Q20A
Cash and cash equivalents Marketable securities Receivables Inventories Prepaid and other current assets Income tax receivable Total Current Assets
184.2 – 636.5 676.8 28.8 28.2 1,554.5
239.3 – 689.2 723.6 30.3 13.9 1,696.3
216.9 – 830.7 762.5 35.5 69.5 1,915.1
361.5 – 901.9 795.6 39.4 16.7 2,115.1
679.5 146.0 845.6 794.1 44.8 26.5 2,536.5
992.2 146.0 784.1 760.7 36.7 26.5 2,746.1
1,128.0 146.0 823.3 798.7 38.5 26.5 2,961.0
1,266.9 146.0 839.8 814.7 39.3 26.5 3,133.1
739.7 146.0 856.6 831.0 40.0 26.5 2,639.8
613.9 146.0 873.7 847.6 40.8 26.5 2,548.5
489.9 146.0 891.2 864.5 41.7 26.5 2,459.7
764.0 149.4 879.5 809.9 67.9 – 2,670.7
853.3 123.2 817.3 834.5 60.9 6.1 2,695.3
949.1 146.4 864.6 777.6 51.2 – 2,788.9
PP&E Goodwill and other intangibles Operating lease assets Other long-term assets Total Assets
2,832.1 544.0 270.8 70.9 5,272.3
2,895.7 1,105.0 – 80.0 5,777.0
2,924.9 883.2 410.0 64.3 6,197.5
3,108.6 1,295.5 – 50.5 6,569.7
3,151.7 1,257.5 234.3 55.8 7,235.8
3,174.4 1,257.5 231.7 56.2 7,466.0
3,236.9 1,257.5 243.3 57.3 7,756.0
3,337.8 1,257.5 248.2 59.1 8,035.7
3,464.3 1,257.5 253.1 61.3 7,676.0
3,578.2 1,257.5 258.2 63.4 7,705.8
3,729.1 1,257.5 263.4 66.0 7,775.8
3,138.6 1,247.9 235.3 55.1 7,347.6
3,114.7 1,178.4 229.7 53.9 7,272.0
3,130.9 1,168.9 231.7 52.2 7,372.6
294.2 53.4 206.6 – 554.2
323.8 59.9 214.6 – 598.3
402.9 60.5 218.0 – 681.4
382.2 76.1 233.9 – 692.2
351.9 76.6 231.2 – 659.7
422.6 81.8 219.9 – 724.3
431.9 96.6 230.9 – 759.5
436.6 96.6 235.6 – 768.8
441.2 96.8 240.3 – 778.3
443.9 97.1 245.1 – 786.0
452.7 97.3 250.0 – 800.0
389.0 77.0 209.0 3.7 678.7
315.2 76.5 223.2 – 614.9
352.1 76.7 259.7 17.3 705.8
Long- term debt Leases Deferred income taxes Compensation and benefits Other long-term liabilities Total Liabilities
2,296.9 22.8 347.0 358.6 59.5 3,639.0
2,645.8 21.6 334.7 357.2 59.6 4,017.2
2,630.4 20.3 239.5 372.5 70.8 4,014.9
2,483.7 19.0 285.2 357.5 59.7 3,897.3
2,476.8 257.7 340.1 375.5 55.0 4,164.8
2,475.7 246.6 325.5 368.3 66.6 4,207.1
2,475.7 259.0 341.8 377.0 70.0 4,282.9
2,475.7 264.1 348.6 370.1 71.4 4,298.7
1,776.5 269.4 355.6 362.8 72.8 3,615.4
1,377.1 274.8 362.7 362.6 74.3 3,237.5
977.7 280.3 369.9 369.8 75.7 2,873.5
2,477.4 258.7 354.3 372.3 56.3 4,197.7
2,478.0 255.4 361.1 369.5 60.0 4,138.9
2,478.7 256.6 363.7 300.7 61.7 4,167.2
Common stock & APIC Retained earnings OCI Total Stockholder's Equity
440.9 1,317.3 (124.9) 1,633.3
452.3 1,447.1 (139.6) 1,759.8
472.1 1,867.4 (156.9) 2,182.6
495.4 2,315.8 (138.8) 2,672.4
525.7 2,704.8 (159.5) 3,071.0
556.1 2,862.3 (159.5) 3,258.9
587.2 3,045.4 (159.5) 3,473.1
618.7 3,277.8 (159.5) 3,737.0
650.4 3,569.7 (159.5) 4,060.6
682.4 3,945.4 (159.5) 4,468.3
715.0 4,346.8 (159.5) 4,902.3
535.8 2,771.1 (157.0) 3,149.9
543.6 2,742.9 (153.4) 3,133.1
549.6 2,806.7 (150.9) 3,205.4
Total Liabilities & Stockholder's Equity
5,272.3
5,777.0
6,197.5
6,569.7
7,235.8
7,466.0
7,756.0
8,035.7
7,676.0
7,705.8
7,775.8
7,347.6
7,272.0
7,372.6
Accounts payable Dividends payable Accrued liabilities Income taxes payable Total Current Liabilities
01/22/2021
6
Ratio Analysis USD mm expect per share data Fiscal Year Ended December 31st Price Valuation Price / Diluted EPS EV / EBITDA EV / Revenue EV Profitability Operating Margin FCF Margin Return on Assets Return on Equity Return on Invested Capital Operating Efficiency Recievables Turnover DSO Payables Turnover DPO Assets Turnover Credit Profile Debt / Assets CFO / Net Debt Net Debt / EBITDA EBITDA / Interest Expense Total Debt Net Det FCF DuPont Analysis Profit Margin Asset Turnover Equity Multiplier Return on Equity
01/22/2021
FY15A $53
FY16A $94
FY17A $117
FY18A $96
FY19A $100
LTM 3Q20 $143
11.87x 6.50x 1.26x 7,237.80
19.78x 9.65x 1.94x 11,214.30
16.54x 9.97x 2.08x 13,382.25
12.31x 7.33x 1.59x 11,136.60
13.62x 7.51x 1.59x 11,065.30
28.72x 11.61x 2.23x 14,878.83
13.06% 7.80% 8.19% 26.43% 19.08%
13.50% 9.12% 8.06% 26.24% 17.71%
14.47% 7.96% 11.07% 33.63% 19.37%
15.22% 8.96% 11.47% 30.17% 20.71%
15.13% 11.60% 10.01% 24.07% 18.99%
11.55% 10.53% 6.43% 14.97% 13.70%
9.02x 40 15.41x 24 1.09x
8.72x 42 14.57x 25 1.05x
8.48x 43 13.69x 27 1.08x
8.10x 45 13.68x 27 1.10x
7.97x 46 14.49x 25 1.01x
7.82x 47 14.90x 25 0.91x
0.44x 0.36x 1.90x 13.02x 2,296.9 2,112.7 448.1
0.46x 0.33x 2.07x 12.66x 2,645.8 2,406.5 526.9
0.42x 0.35x 1.80x 13.08x 2,630.4 2,413.5 513.1
0.38x 0.56x 1.40x 15.98x 2,483.7 2,122.2 628.7
0.34x 0.73x 1.12x 11.44x 2,476.8 1,651.3 807.9
0.34x 0.79x 1.08x 9.87x 2,478.7 1,383.2 701.7
7.52% 1.09x 3.23x 26.43%
7.70% 1.05x 3.28x 26.24%
10.29% 1.08x 2.84x 33.63%
10.44% 1.10x 2.46x 30.17%
9.92% 1.01x 2.36x 24.07%
7.05% 0.95x 2.30x 14.97%
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