Industry Reports

Deutsche Bank Reports Summaries

080409 Deutsche Bank Report - Q1 Earnings Estimates

Deutsche Bank - Equity Research

* What happened during Q1? What lies ahead? 

We're providing some final earnings estimate adjustments as well as some thoughts on Q1 conference calls.  Below are summary thoughts on both the past quarter as well as the trends ahead.

* Q1 Performance Was Mixed

In lumber & building products, prices reached yet another new low, dipping below what we thought were trough levels.  In pulp & paper, domestic volumes have been relatively sluggish, especially in paperboard packaging.  However, supply reductions and favorable trade flows are pushing prices higher in most grades.  The notable exception was in containerboard, where a $50/ton price hike initiative failed to be implemented in March. 

* Looking Ahead to Q2 & Beyond

Prices continue to trend higher in most paper grades.  The biggest pricing question mark is containerboard.  Fears about the sector?  The 2 key fears are: (1) the slowing economy and (2) inability to pass along higher costs.  Both fears are legitimate.  In wood products, the issue remains the housing market.  Q2 & Q3 are seasonally strong, but we expect the seasonal pick-up to be muted this year.  The impact of low wood products prices is also having further “ripple effect” into upstream timber pricing.

* Corporate Initiatives

After dramatic restructuring in recent quarters by several companies, the biggest remaining issues still revolve around Weyerhaeuser.  After the divestiture of the white paper and the packaging businesses, the question still remains, “what happens next?”  Away from Weyerhaeuser, investors are also keeping a careful eye on MeadWestvaco and its land position in South Carolina.  We think another interesting situation is developing around Wausau Paper. 

* Valuation/Risk

Overall, paper companies and packaging companies appear to be trading within their historical norms, 1.4x book and 6.2x '08 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.