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Deutsche Bank Reports Summaries

080123 Deutsche Bank Report - PKG's 4Q07 in 200 Words, Upgrade to Buy

Deutsche Bank - Equity Research

Packaging Corp. of America {Ticker: PKG, Closing Price: USD 23.82, Target Price: USD 30.00, Recommendation: Buy}.

* Lowering Price Target to $30 but Upgrading to Buy

Guidance for Q108 came in well below street estimates.  We've reduced our price target to $30 from $32 to reflect our reduced '08

estimates.   PKG offers good assets, superior margins, strong b/s (just over $4/share in net debt), 5.0% current yield and ongoing repurchase program.  At current levels the stock looks attractive and we are upgrading to Buy. 

* Q4 Operating performance

Mill vol's +0.3%, despite 11K/ton of lost volume from Counce, TN mill outage.  Box vol's -1.2% on avg workday basis.  For FY07, mill vol's +1.8% & total COGS up < 3%   = 1% rise in unit costs.  FY07 SG&A & corporate overhead rose 7.2%. 

* Other issues

(1) Ended Q4 w/ $677MM in LT debt & $228MM in cash, (2) Repurchased 778K shares for $23MM = $28.85/share, $119MM in remaining authorization, (3) FY08 capex = $110-120MM, (4) Box vol's thru mid- January +6%, (5) Lion's share of autumn hike in by October.  We are adjusting '08 estimates from $2.20 to $1.85/share and '09 from $1.90 to $1.95.

* Valuation/Risks

Our $30 target price is based on an 8X 2008 EV/EBITDA multiple.  Historically, transaction multiples for containerboard companies have been about 9X LTM EBITDA, but we slightly haircut this to account for the cyclically stronger than average conditions over the last year. PKG is sensitive to industrial activity, and faces fluctuations in various input costs, including energy, pulpwood, and wastepaper costs.