Pactiv: Should You Buy It?

Funding for its pension has raised questions of whether the stock has already priced in any damage.
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is a packaging company that has held up much better than its peers in 2008. The stock is down just 8.5% year-to-date, closing Wednesday at $24.37, compared with an average 31.5% loss for the group, according to Bloomberg.

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Focusing primarily on plastic packaging for food and consumer products like Hefty trash bags, the company has been selling into one of the few areas where spending has been relatively stable during the economic slowdown.

In fact, the company posted solid third-quarter results Oct. 20. Pactiv earned 37 cents a share, which was 2 cents ahead of the consensus analyst estimate. Revenue grew 6% from the previous year to $925 million, which was also $9.1 million ahead of expectations. The company was able to pass along higher plastic costs to its customers, but sales volume also grew 1% from the previous year.

Even so, one problem the company is facing is some recent losses in its pension fund. Given the decline in the major stock-market averages, Pactiv's fund has gone from being overfunded at the end of 2007 to currently being underfunded.

And while investors have paid little attention to pension accounting since the last market swoon in 2001-2002, what makes Pactiv's case stand out is that its total obligation of $4 billion exceeds the company's total market capitalization of $3.2 billion.

With that in mind, I'm here to answer readers' questions: Should you buy it? Does Pactiv offer value at current levels, or will the company's pension issues continue to weigh on the stock heading into 2009?

Before readers dismiss the potential effect of a pension shortfall, one should look back at what happened to

Lockheed Martin

(LMT) - Get Report

earlier this week. The company posted strong third-quarter results Tuesday morning, but the stock dropped nearly 10% on the session after management lowered 2009 profit guidance by 30 cents a share, primarily because of lower expected pension income.

As far as Pactiv's pension issues, according to an Oct. 20 downgrade at Merrill Lynch, given the company's 70% equity exposure in its investments at the beginning of the year, Pactiv is facing a potential $1 billion deficit. That's real money, not to mention the $50 million that the company would normally record in pension income through its income statement, because of archaic accounting rules.

At current levels, Pactiv is trading at 14.4 times expected full-year earnings of $1.70 a share. That is the highest multiple in the industry, as well as a 30% premium to the benchmark

S&P 500

. So despite the company's strong customer demand, with a 101% debt-to-equity ratio and no dividend support, I believe that Pactiv's pension issues could drive the stock back under $20 in the coming quarters.

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David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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