Deep Dive: Packaging giants merger sheds light on this outperforming stock

The combined Rock-Tenn and MeadWestvaco will have sales nearly twice as high as their next largest publicly traded U.S. competitor, but investors might want to take a look at Packaging Corp. of America, which has greatly outperformed the rest of the sector over the past five years.

Rock-Tenn Corp. RKT, +6.13% of Norcross, Ga., and MeadWestvaco Corp. MWV, +14.01% of Richmond, Va., announced a merger on Monday, which sent shares of Rock-Tenn up as much as 12%, while MeadWestvacos stock was up as much as 20%.

While MeadWestvaco had considerably lower sales than Rock-Tenn during 2014 and a lower market capitalization when the market closed on Friday, the companys shareholders will wind up holding 50.1% of the yet-to-be named new companys stock. But Rock-Tenns CEO Steven C. Voorhees will be the CEO of the combined company.

The combined companys net sales for 2014 came to $15.7 billion, which was nearly twice as high as the sales of the next largest U.S. competitor. The companies expect the combination to lead to $300 million in annual cost savings over the next three years.

Heres a list of all 13 S&P 1500 stocks in the Containers/Packaging subsector, with the merging companies at the top, followed by the rest, ranked by sales for the past 12 reported months (most havent yet announced results for the fourth quarter of 2014):

In comparison to those total returns, the S&P 1500 Composite Index returned 13% during 2014. The three-year total return for the index through Friday was 110% and the five-year return was 121%.

MeadWestvaco was last years best performer among the group, but Packaging Corp. of America PKG, +1.87% of Lake Forest, Ill., ran a close second and has run way ahead of the pack with a three-year return of 227% and a five-year return of 333%.

Packaging Corp of America acquired Boise Inc. in December 2013 for $2.1 billion, which helped it grow net sales for the first three quarters of 2014 by 84% to $4.42 billion. The company will announce its fourth-quarter results today, after the market close.

Packaging Corp. of America expects the Boise acquisition to lead to $175 million in annual cost savings by the end of 2016. The company said its annual run rate for cost savings had climbed to roughly $110 million at the end of the third quarter. The cost cutting is very important to investors, as PKGs operating profit margin for the third quarter declined to 12.4% from 16.9% a year earlier.

The strength of PKGs stock has reflected five years of strong sales growth, and 2015 should be a good one for the company. For starters, the decline in gasoline prices is lowering its transportation costs and freeing up more consumer cash that could be spent on packaged products, which will help most packaging manufactures. But Packaging Corp. of America will also have a boost to production, because it recently completed the conversion of its newsprint manufacturing facility in DeRidder, La., to containerboard manufacturing.

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Deep Dive: Packaging giants merger sheds light on this outperforming stock