Industry Reports

Deutsche Bank Reports Summaries

080122 Deutsche Bank Report - Q4 Earnings

Deutsche Bank - Equity Research

* What happened during Q4? What lies ahead in 2008? 

We're providing some final earnings estimate adjustments as well as some thoughts on pending Q4 conference calls.  Below are summary thoughts on both the past quarter as well as the trends ahead.

* Q4 performance was mixed

In the pulp & paper sector, domestic volumes have remained disappointing.  However, rising exports & falling imports as well as supply reductions have helped market prices in most segments.  On a q/q basis, Q4 saw prices flat or slightly higher for most pulp & paper commodities.  The biggest winner was LWC.  For lumber and other building products, Q4 represented yet another tough quarter.  Lumber and panel prices spent Q4 near trough levels. 

* Looking ahead to Q1 & beyond

Paper pricing is showing surprising momentum.  In a number of paper commodities, there is another round of price hikes currently in the market.  Can prices continue to go higher?  In 2007, prices moved higher on most grades, as supply discipline and a falling US$ overcame sluggish demand.  In 2008, we think that paper pricing momentum will be harder to maintain, because of a weaker economy and incrementally higher starting margins.  In wood products, we expect 2008 to be another disappointing year, with prices bouncing along the bottom.

* Corporate initiatives

On the paper & forest products side, the biggest remaining issue involves Weyerhaeuser.  Weyerhaeuser continues to explore alternatives for its containerboard & packaging operations as well as the larger issue of its ultimate corporate structure (a timber REIT?).

* Valuation/risk

Overall, paper companies and packaging companies appear to be trading within their historical norms, 1.7X book and 7.7X '08 EBITDA respectively. The primary risks involve momentum in the economy, the health of demand within key grades like containerboard and white paper, and additional energy, chemical, and freight cost inflation.  Companies with significant exposure to the CN$ will suffer from the strength of that currency.