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080422 Deutsche Bank Report - PKG's 1Q08 in 100 Words

Deutsche Bank - Equity Research

Packaging Corp. of America {Ticker: PKG, Closing Price: USD 21.40, Target Price: USD 30.00, Recommendation: Buy}.

* Short of expectations.   PKG reported Q1 EPS of $0.31/share.  DB @ $0.36, FC @ $0.34.  Pointing to $0.13/share of y/y cost inflation,$0.07 in energy, balance in fiber, labor, chemicals and bad debt. 

* Costs are a key issue.    Revenues were only $1MM off our forecast.   Vol's were essentially flat, while industry vol's slightly negative.  Other producers will be under more pressure as PKG is better hedged on energy & fiber costs.  

* “The rubber hits the road?”   Industry must pass along sharply higher raw materials or watch margins erode.  C'board has the best shot.  Slow economy creates headwind, but weak US$ & 97% oper'g rate help pricing.  Leading players (IP, SSCC, GP, TIN) now completely/largely driven by c'board.  We expect late summer hike. 

* Other issues: (1) repurchased 886K/shares @ $23, $110MM remaining under authorization, (2) $150MM 10yr bond issue 6.5% to take-out existing 5yr notes, also new 5yr $150MM revolver. 

* Bottom line:   Best stock in uncertain environment. Best margins, solid balance sheet, big dividend (5.6%) and consistent management.  Maintain Buy.  Trimming earnings to reflect costs: 2008 from $1.70 to $1.50, 2009 from $1.95 to $1.85.