When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Packaging Corporation of America (NYSE:PKG) as a stock to potentially avoid with its 19.1x P/E ratio.  Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.  

Packaging Corporation of America has been struggling lately as its earnings have declined faster than most other companies.   It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing.  You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.    

View our latest analysis for Packaging Corporation of America

NYSE:PKG Price to Earnings Ratio vs Industry January 8th 2024

Keen to find out how analysts think Packaging Corporation of America's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?  

In order to justify its P/E ratio, Packaging Corporation of America would need to produce impressive growth in excess of the market.  

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 21%.   Still, the latest three year period has seen an excellent 76% overall rise in EPS, in spite of its unsatisfying short-term performance.  Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.  

Turning to the outlook, the next three years should generate growth of 4.5%  each year as estimated by the eight analysts watching the company.  With the market predicted to deliver 13% growth  per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Packaging Corporation of America is trading at a P/E higher than the market.  It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen.  Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.  

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Packaging Corporation of America currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market.  Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long.  Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.    

We don't want to rain on the parade too much, but we did also find 4 warning signs for Packaging Corporation of America that you need to be mindful of.  

If you're unsure about the strength of Packaging Corporation of America's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.