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Deutsche Bank Reports Summaries

070504 Deutsche Bank Report - Caraustar's 1Q in 100 Words

Deutsche Bank - Equity Research

Caraustar {Ticker: CSAR.OQ, Closing Price: USD 7.01, Target Price: USD 8.00, Recommendation: Hold}.

* Below consensus. 

Reported GAAP EPS of $(0.31). Net of specials, looks like $(0.13). A slightly lower-than-expected tax rate was a $0.03 negative. DB @ $(0.15) & FC @ $(0.05). Comps: 4Q06 = $(0.05) & 1Q06 = $(0.03). Issues: sharply higher fiber costs ($24/ton q/q) and flat prices, weak vol's (10.0% y/y decline in paperboard vol's [industry = - 7.6%]).

* Product vols.

Gypsum facing paper: -29.3% y/y, -1.6% q/q (PBL ran only about 50% gypsum paper). Tube & core: -10.3% y/y, -0.8% q/q.

Specialty: -13.7% y/y, +1.9% q/q, adjusted for divestitures. Folding carton: +24.9% y/y, +2.1% q/q.

* Price/Margins.

Mill margins -$22.4/ton q/q (price +$0.1/ton, fiber cost -$24.2/ton, fuel & energy cost +$1.7/ton) and -$11.3/ton y/y. T&C margins

+$29.3/ton q/q (price +$26.0/ton, paperboard cost +$3.3/ton) and +$35.4/ton y/y.

* 2Q outlook.

Results should improve significantly: (1) better margins, with wastepaper costs about flat and $35-40/ton of price (+$7MM), (2) seasonally stronger vol's (+$2MM), and (3) other - lower energy usage, better PBL op's, lower SG&A (+$2MM).

* Other Issues.

(1) New law requires cash pension contribution in '07 of $14MM in addition to $2MM previously planned (book pension expense = $9MM). (2) Capex in '07 = $20-25MM, about half of which is maintenance. (3) Closed Lafayette, IN mill & York, PA FC plant. (4) SG&A down from 13.5% to 12.6% y/y - slowly getting toward 10% goal.

* Change in view?

Not really. Weak qtr, but no surprise, given spike in wastepaper costs. 2Q should see return to positive EPS. Maintain Hold.

Valuation multiples are not low, but very low margins imply operating leverage & option value. Boosting estimates: '07E goes from $0.10 to $0.25 (2Q = $0.10), '08E goes from $0.30 to $0.40.