::The Center for Paper Business and Industry Studies::

061218 Deutsche Bank Report - Top Ten Things to Watch in 2007

Deutsche Bank - Equity Research

Key issues for 2007

We highlight below 10 things to watch for in 2007. A few of the key issues are referenced on this cover page, and all 10 are discussed below.

Can paper companies “manage through” an economic slowdown?

Evidence of success would be bullish for stocks. The first 6 months of 2007 will be the "acid test". At year-end, containerboard and uncoated white paper showed some cautiously optimistic signs. On the other hand, newsprint remains a tougher story.

Have we really seen the bottom of the building products cycle?

We're skeptical. Irrespective of the housing market, many building products markets appear overbuilt. After 3 banner years, we think it will take more pain to force marginal capacity out of the industry.

One step closer to the "Holy Grail"?

More consolidation seems certain in containerboard. Some think that the US will contract to 3 key players. 2007-08 could see 1-2 steps in this direction. The surprise? The biggest players may not be the consolidators.

Valuation/risk

Paper companies are trading around 1.5x book value and 6.5x estimated “peak” earnings---a bit more than half of the historically high “peak” multiple. Packaging companies are trading around 17.4x our '07 EPS estimate, with tight variance within the sector. Overall the sector is trading in-line with historical norms. 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.