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071211 Deutsche Bank Report - Lower 4Q Earnings for TIN Financial Services

Deutsche Bank - Equity Research

Temple-Inland {Ticker: TIN, Closing Price: USD 36.71, Target Price: USD 65.00, Recommendation: Buy}.

Temple-Inland reduced 4Q earnings guidance for its Financial Services business (Guaranty Financial Group) as a result of an increase in the company's expected loan loss provision. Earnings for the segment are now estimated to be in the range of $15M-$20M (c.$15M lower than previously anticipated). With the revision, the company now anticipates FY07 earnings for the segment to be in the range of $150M-$155M. As a result, we are lowering our 4Q and FY07 EPS estimate for TIN by $0.08 per share (4QE goes to $0.23 from $0.31 and FY07E goes to $1.72 from $1.80).

The increase in the loan reserve is disappointing. But, the revisions are not shocking in light of turmoil in the real estate markets. The news is also consistent with previous disclosures in TIN's filings discussing business challenges with loans to homebuilders and market conditions in California and Florida. TIN's Financial Services business is to spin-off from Temple-Inland as a tax-free distribution to TIN shareholders on December 28th, 2007. The steep drop in TIN's value since late July appears to be discounting a significant amount of “bad news” in real estate and banking markets. At a current price of just under $36/share, it appears that the market is valuing residual TIN at something in the $24-25/share range, and Guaranty Financial and Forestar Real Estate at $10-12. These levels imply Guaranty at roughly tangible book value ($955M) and Forestar at little more than the value of its timberland.