Industry Reports

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080424 Deutsch Bank Report - Pactiv's 1Q in 100 Words

Deutsche Bank - Equity Research

Pactiv {Ticker: PTV.N, Closing Price: USD 24.50, Target Price: USD 35.00, Recommendation: Buy}.

OK 1Q, but lower guidance. 1Q EPS net of special items = $0.33. DB @ $0.32 & First Call @ $0.31. Comps: 4Q07 = $0.45, 1Q07 = $0.43. As expected, 1Q margins were squeezed by rising resin costs and the lag in raising prices. Real issue is '08 guidance. PTV lowered the EPS outlook from $2.00-2.10 to $1.85-2.05, pointing to high input costs and sluggish volumes due to the weak economy.

Segments.

Consumer/Hefty. Sales +17%, largely driven by Prairie acq'n. EBIT (net of charges) $35MM (12.1% margin) vs. $54MM (21.9% margin) in 1Q07. Price hike of about 4% was implemented in mid-March.

Food Service/Packaging. Sales +20%, driven by Prairie and 4% increase in prices. EBIT (net of charges) $55MM (10.6% margin) vs $50MM in 1Q07 (11.6% margin).

Other Guidance Items: (1) '08 FCF target lowered from $200-220MM to $180-215MM (impacted by $60-70MM in add'l w/c) - - - once Prairie is internalized, FCF should increase sharply (2) '08 SG&A to rise $15- 25MM y/y (about $15MM less than previously thought) - mostly Prairie, (3) '08 Capex still @ $150MM v. D&A of $185MM, (4) '08 cash tax rate = 27%, (5) noncash pension income = $49MM pretax, $31MM

($0.23) after tax.

Bottom line? It's a challenging time. Compared to some other packagers, PTV is being hurt by (1) lack of direct input-cost pass- thru provisions, (2) greater exposure to consumer discretionary spending in Food Service, and (3) lack of international exposure.

Still, PTV's historical performance suggests that margins will eventually recover, and we think that sell-off in stock reflects overly negative sentiment. Maintain Buy. Trimming estimates: '08 goes from $2.05 to $1.90 (2Q = $0.50) and '09 from $2.30 to $2.20.