Industry Reports

Deutsche Bank Reports Summaries

080122 Deutsche Bank Report - Q4O7 Outlook on Packaging

Deutsche Bank - Equity Research

* Where Have We Been in Q4? Where Are We Headed in ‘08?

We're providing final earnings estimate adjustments as well as thoughts on pending Q4 conference calls. Below are summary thoughts on both the past quarter as well as our 2008 outlook. Additionally, we have provided an overview of cost & volume trends in the packaging arena. 

* Lackluster volumes, FX benefits & cost headwinds are keys in Q4

We expect a pattern of soft domestic volumes to persist during Q4 of '07.  This reflects a widespread cyclical easing in the economy.  Offshore volumes are likely to have remained firm during Q4.  This will aid companies with a high proportion of offshore sales/earnings.  This fundamental strength will be amplified by translation gains from a weaker US$.  On the cost side, Q4 aluminum prices eased relative to H107.  However, overall cost pressures remained intense.   Plastic resin & energy costs rose during Q4. 

* 2008? Are the packagers “defensive” in the face of a slowing economy? 

The US economy is slowing and we expect volume comparisons to erode during ‘08. By 2008H2, we expect evidence of an economic ripple moving from the US to offshore markets. Will packagers prove “defensive” in this environment?  Ordinarily, a slowdown produces a sharp drop in commodity prices and some input cost relief for packagers.  This time around, some of that pressure commodity prices may be mitigated by the weakness in the US$.   Strengthening in the US$ could put extra pressure on US$-denominated commodity prices, but would also create “translation headwinds” for packagers.

* Top Packaging Picks for 2008

Our top packaging picks for 2008 are Pactiv, Rock-Tenn and Greif.  We think investors have understated the potential in Pactiv's acquisition of Prarie Packaging.  We are also struck by the prospective cash flow accretion from Rock-Tenn's purchase of Southern Container.  Finally, if Greif reaches its FY09 EBIT margin targets, EBIT should increase by more than 25% from '07 levels - - - excluding any acquisitions.

* Valuation & Risks

On an EV/EBITDA basis, most companies are currently in the 6.5-7.5X range (based on '08 estimates) – which is in-line with historical multiples.  We don't find valuation for the group to be particularly aggressive.  Upside risks include greater-than-expected volumes, currency benefit, and pricing benefit, as well as moderating input costs such as resin, aluminum, wastepaper and natural gas. Downside risks include increased competitive activity, rising input costs, failure to pass through higher costs, and economic weakness in the U.S. and Europe.