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080124 Deutsche Bank Report - Rock-Tenn's Fiscal Q1 in 100 Words

Deutsche Bank - Equity Research

Rock-Tenn {Ticker: RKT, Closing Price: USD 26.72, Target Price: USD 50.00, Recommendation: Buy}.

* About in-line with DB, slightly ahead of FC.   EPS net of special items = $0.51.   DB @ $0.50 and FC @ $0.47.  Comps: F4Q07 = $0.57; F1Q07 = $0.40.  Earnings quality looks OK.  Tax rate was a bit lower than expected, but Demopolis annual outage costs were a bit higher than normal.  Paperboard was weaker than expected, but packaging was stronger than expected.  < /p >

* Paperboard.  EBIT @ $21.5MM = -7.8MM q/q and -$2.4MM y/y.  First y/y decline in 8 quarters, impacted by unusually heavy Demopolis outage, compared with unusually light outage last year.  Bigger issue is that costs (especially OCC) rose more than prices last 2 qtrs.   Pending price hike initiatives (market pulp, bleached paperboard, URB) should help. 

* Packaging.  EBIT @ $16.3MM = +$4.2MM q/q, +$4.6MM y/y.  Best quarter in several years.  5.0% operating margin (up from 3.9% in F1Q07) driven by good volumes and internal cost/operating initiatives.

* Merchandising Displays & Corrugated.  EBIT @ $10.2MM = -$2.6MM q/q and +$3.3MM y/y.  Solid result for seasonally weak quarter.

* Other issues: (a) '08 capex = $75-80MM on legacy businesses (75% of D&A), $90-95MM overall (60% of D&A), (b) '08 pension expense = $8MM ('07 was $13MM); '08 cash contribution = $23MM  (funded status = -$47.3MM, much improved from -$111.3MM just two years ago), (c) with Southern Container deal pending, focus is now on debt reduction.

* Change in View?  Not really.  RKT still looks like arguably the cheapest stock we cover, and Southern Container deal should drive free cash flow yield even higher.  Maintain Buy & $50 price target.  Boosting estimates slightly: '08 goes from $2.65 to $2.70 (F2Q = $0.65), '09 goes from $3.10 to $3.15.