Industry Reports

Deutsche Bank Reports Summaries

080512 Deutsche Bank Report - Crunch point?  Containerboard Price Hike?

Deutsche Bank - Equity Research

* Recent events may support containerboard prices

An explosion is causing an unexpected outage at a large IP mill, and the IP/WY deal received quick regulatory approval.  Without that IP mill, the effective linerboard operating rate is near practical capacity.  At the same time, the rapid approval of the IP/WY deal removes a potential “loose cannon” from the market.

* The other critical issues are the economy and industry discipline

Industry data and anecdotal reports suggest a relatively slow/sluggish box market.  The risk, of course, is that box volumes could slow further if the economy dips.   While the economy is the big exogenous wildcard, industry players have somewhat more control over their own behavior in the market.  Big integrated producers are going to have to sacrifice volume and adopt new pricing policies.

* Will it happen?

It's hard to tell.  The timeframe for an increase is typically in the late summer/early autumn.  While the economy is a large cause of uncertainty, there are a number of factors which look unusually favorable.  Operating rates are high.  Inventories remain at historically lean levels.  The cost pressures are large & legitimate, and they are driving up the cost of competing materials.  Finally, the US$ is at its weakest point in nearly a generation.

* Valuation/risk

We use various methods to value the stocks, including PE, book and EBITDA.  Overall, paper companies and packaging companies appear to be trading at the low end of their historical norms, 1.3x book and 6.9x '08e EBITDA, respectively. The primary risks involve momentum in the economy, the health of demand for industrial production, currency exchange rates, and additional energy, chemical, and freight cost inflation.