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071025 Deutsche Bank Report - SSCC's 3Q in 100 Words

Deutsche Bank - Equity Research

Smurfit-Stone Container {Ticker: SSCC, Closing Price: USD 11.93, Target Price: USD 15.00, Recommendation: Buy}.

* Sharp sell-off = buying opportunity. SSCC reported 3Q EPS of $0.11, net of specials. DB @ $0.09, FC @ $0.10. The issue is

guidance: (1) guiding to sequentially lower 4Q (FC had $0.04 q/q improvement), (2) call suggested 1Q08 would fall below 4Q07. W/ $40/ton ctbd hike & box increase, prospect of falling EPS may appear unforgivable to some. While disappointed, we think the overall story remains intact. We're maintaining '08 estimate of $0.60, and in fact we see upside risk from there.

* 3Q results? Weak box vol's (-8% y/y, per work day), most of this owes to closures/exiting unprofitable business. Mill vol's about flat y/y. Prices rose slightly q/q on containerboard (+1.6%) & boxes (+1%).

* Why 4Q will be lower: 30-40K d'time ($0.04-0.05), higher energy usage($0.03-0.04), Brewton mill sale ($0.02), and cost inflation

($0.02-0.03) = $0.11-0.14. Price hike worth $0.18/qtr when fully in- place, but 4Q will see only 60% on q/q basis.

* Lower 1Q08? Seasonal benefit costs ($0.05-0.06), incremental 20K d'time ($0.02-0.03), and cost inflation. Balance of box hike will offset most, but not all.

* Why aren't we more dismayed? (1) new acct'g rules increase SSCC's seasonality, (2) Even w/ $0.07 in 1Q08, we see little risk to DB's $0.60 est. for FY08 - assuming flat prices, (3) we think pricing bias is up, not down, (4) FC for '08 at $0.83 will need to come down, but was skewed up by outliers.

* View? At $0.60 in EPS, free cash flow/share = more than $1, fair return on $12 stock. Positive option value includes (1) potential for consolidation with WY packaging business and (2) more pricing gains. Maintain Buy and $15 price target. Our 4Q estimate goes down to $0.09, but no change to FY08 at $0.60 or FY09 at $0.90