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080129 Deutsche Bank Report - SSCC's 4Q 07 in 100 Words

Deutsche Bank - Equity Research

Smurfit-Stone {Ticker: SSCC.OQ, Closing Price: USD 9.59, Target Price: USD 15.00, Recommendation: Buy}.

About in-line. SSCC reported 4Q EPS of $0.09, net of specials. DB @ $0.09, FC @ $0.08. Comps: 3Q07 = $0.11, 4Q06 = $0.08. Rising prices and benefits from cost initiatives largely offset cost inflation & d'time. Closed 28 box plants & reduced headcount by 5,350 last 3 yrs.

4Q operating metrics? Box vol's fell 8% y/y per work day, 6% y/y of decline due to closures/exiting unprofitable bus. Mill vol's fell 104K tons y/y (5.5%), due in part to 49K tons of mtce d'time & asset sales. Prices rose 5.7% q/q on linerboard & 2.4% ($26/ton) q/q on boxes.

Cost inflation is big factor. In FY07, SSCC benefited $0.66/share y/y in price ($282MM pre-tax, or $34/ton on 8.3MM tons). They also got $0.46/share y/y in cost savings benefits ($195MM pre-tax). But EPS rose just $0.32/share, due to $0.80/share in cost inflation ($341MM pre-tax, or almost 6% of COGS). Fiber was a big part of this, but non-fiber costs rose 4-5%.

Estimates: For 1Q, we see about $0.04. We start with 4Q's $0.09, subtract $0.08 in seasonal factors, add back $0.06 in price, and assume that cost inflation will exceed initiative benefits by $0.03.

FY08? No change to our $0.60 estimate. (1) Start with FY07's $0.17,(2) add $280MM pre-tax or $0.66 in historical price (current vs.

FY07 avg), (3) add $0.14 in anticipated price, (4) add $0.20 in cost initiatives, and (5) subtract $0.57 in cost inflation ($244MM pre- tax = 4% of $6.1B in FY07 COGS).

View? We're perplexed at today's 13% jump, but after sell-off in recent months, we believe the stock remains cheap. At $0.60 in EPS, free cash flow/share = about $1/share, more than fair on a stock under $10. With supply/demand fundamentals tight, a containerboard price hike announcement wouldn't surprise us. Maintain Buy and $15 price target.