Analyst Actions: Credit Suisse On US Paper & Packaging - 4Q11 Preview; Owens-Illinois Remains Top Pick. Revising Ests and TP


Mixed Earnings Season Ahead: "Earnings season kicks off on 23rd Jan when Packaging Corp of America ( PKG ) reports after the close. While the market has notched a strong start to the year, we believe preannouncements by Sonoco and MeadWestvaco serve as reminders of ongoing macro risks and generally sluggish conditions in developed markets within our coverage universe. As such, our bias within our Paper & Packaging coverage universe continues to skew more to the defensive with the exception is Owens-Illinois ( OI )."

We Remain Confident Owning OI Shares Into 4Q11 Earnings: "While shares of Owens-Illinois ( OI ) have recently enjoyed a nice run, we remain comfortable ahead of 4Q11 earnings. Recent industry checks continue to give us confidence that OI will achieve enough pricing this year to recover last year's $0.80/share inflationary cost headwind. We believe risk/reward into the 4Q11 print is favorable at $25/share or under, and continue to see upside to our $30 target price."

SBS Price Drop Highlights Risks Within Paper Packaging: "SBS prices dropped $20/ton in January, noting that demand has been sluggish for most of 2011. While demand has been soft during a slow seasonal part of the year, we were still surprised by the price decline as it comes on the back of a major mill outage by MeadWestvaco. The decline in SBS is the first since May 2009. We believe an announced $40/ton price hike for CUK grades in February should help limit the negative SBS price momentum. Nevertheless, we believe the January SBS price decrease highlights the macro risks for paper packaging stocks, and could temper some of the recent positive investor sentiment for IP and RKT."

Warming up to Domtar ( UFS ) as Bottom Looks to be in Sight for Pulp Prices: Although Domtar shares have enjoyed some recent strength and pulp producers still need to do more work to reduce inventories, we note that discussions with trade contacts give us more confidence that pulp prices will bottom in 1Q12. Meanwhile, although uncoated free sheet is in secular decline, we expect the market to be pretty balanced given capacity reductions. We attribute to the recent reported slippage of uncoated free sheet prices primarily to typical seasonal discounting rather than underlying price weakness. We are becoming more constructive on Domtar given the company's inexpensive valuation metrics, although we continue to hold off getting more aggressive until we can get more comfortable with a large increase of pulp capacity in 2013.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing , Commodities

Referenced Stocks: OI , PKG , UFS

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