Industry Reports

Deutsche Bank Reports Summaries

080417 Deutsche Bank Report - SSCC Pre-Announces 1Q EPS

Deutsche Bank - Equity Research

Smurfit-Stone Container {Ticker: SSCC, Closing Price: USD 6.71, Target Price: USD 15.00, Recommendation: Buy}.

* SSCC pre-announced a 1Q EPS loss of $(0.04).  We were at $0.00, and First Call was at $0.01.  The weakness in 1Q is no surprise.  Estimates have been falling quickly.  As little as 2 weeks ago, First Call was at $0.04.  Still, the magnitude of the miss is disappointing.

* The issues?  Aside from seasonal factors already in the numbers, Smurfit is pointing to soft demand and cost inflation.  Average week box shipments for the industry were down 2.2% y/y for the first two months of the year, and March volumes, due to be released tomorrow, are unlikely to be any better.  On the cost side, OCC prices reached their highest point in years in 1Q, and natural gas prices are up sharply in the last few months.  Besides those issues, we think another factor may be execution challenges that we referenced in Monday's note, “Containerboard markets, Prices easing?”

* Based on this release, we are reducing our 1Q number for SSCC from $0.00 to $(0.04).  Our '08 estimate goes from $0.35 to $0.20, and '09 goes from $0.70 to $0.50.

* Implications for the other producers?  This clearly adds to the risks for others, especially Temple-Inland.  Packaging Corp. is less vulnerable, because of less exposure to OCC and purchased energy.  IP and Weyerhaeuser have other businesses that have the potential to offset the containerboard weakness.

* What to do with the stocks?  While the industry is clearly facing serious challenges, we don't think it's time to “throw in the towel,” especially after the stocks inevitably come under pressure tomorrow.  The weakness in spot prices that we referenced on Monday reflects small volumes sold by small producers. Whether this spills over to the broader market remains in doubt, especially as cost inflation reduces the industry's “wiggle room.”