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.