Industry Reports

Deutsche Bank Reports Summaries

080407 Deutsche Bank Report - Containerboard Quarterly

Deutsche Bank - Equity Research

* 4Q results improved y/y

4Q results showed solid y/y improvement at most firms, driven by a $40/ton price hike that started to be implemented in August. The price gains were partially offset by slightly lower box volumes and higher input costs. OCC prices rose to an average of $128/ton, a dramatic increase over the $74/ton average of 4Q06. The q/q comp was mixed, due to seasonally weaker volumes.

* 1Q should be seasonally weaker but stronger y/y

Looking ahead to 1Q, results are again likely to be seasonally weaker on a q/q basis, but better on a y/y basis. Just as in 4Q, the y/y comps will benefit from last autumn's price hike, but the gains should be muted by weaker volumes and rising input costs. Looking beyond 1Q, the biggest issue is whether producers can gain traction on the current price hike initiative.

* Fraying fundamentals put price-hike initiative at risk

The $50/ton price hike initiative failed to stick in March. Can the industry begin to implement it in April? The biggest issue is sluggish box demand. Avg wk box vol's fell 3.7% y/y in February, despite a very easy comp. A slowing economy and an ISM reading under 50 do not bode well for the next few months. Inventories remain lean by historical standards but have trended slightly higher in recent months. High operating rates and a weak US$ are the positive data points.

* Industry consolidation

International Paper agreed to acquire Weyerhaeuser's containerboard operations for $6.0B in cash. The price was higher than we expected. Compared to the Reverse Morris Trust structure that we anticipated, the cash deal creates a substantial tax penalty for WY and a significant tax benefit for IP.

* Valuation/risk

We use various methods to value the stocks, including PE, book and EBITDA. Overall, paper companies and packaging companies appear to be trading at the low end of their historical norms, 1.6X book and 6.0X '08E EBITDA, respectively. The primary risks involve momentum in the economy, the health of demand within key grades like containerboard and white paper, and additional energy, chemical, and freight cost inflation. Companies with significant exposure to the CN$ will suffer from the strength of that currency.