Industry Reports

Deutsche Bank Reports Summaries

080414 Deutsche Bank Report - Containerboard Prices Easing?

Deutsche Bank - Equity Research

* Increasing pressure on “spot” prices for containerboard

Discounting is appearing in both domestic & export markets, and “spot” prices appear to be down $20-40/ton in recent months. 

While it's possible that this is mostly due to seasonal 1Q weakness, we think that it may also reflect a scramble for orders in the face of a slowing economy.  Whether this discounting will have any major impact on financial performance remains unclear.

* A challenging 2008 for Smurfit-Stone?

SSCC is starting up several large new state-of-the-art corrugators.  While the new equipment should improve efficiency over time, we suspect the start-up of these mega-plants will cause supply disruptions and incremental costs.  We wouldn't be surprised if transition costs trimmed $0.05-0.10/share off earnings in the final 9 months of 2008.  We don't think these costs are baked into most Street estimates.

* Opportunity to boost margins after the IP/WY deal?

We think that IP would like to use healthy industry operating rates to recalibrate a number of major WY contracts.   Ultimately, we

think contract adjustments will entail not only pricing levels, but also features such as cost pass-through provisions.  IP appears intent on generating returns at both the mill and the box plant levels.  If containerboard market fundamentals remain healthy, this could set the stage for some rebuilding of anemic industry returns, especially on the converting side of the industry.

* 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, 1.3x book and 6.1x '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.