Rock-Tenn Down to Strong Sell - Analyst Blog

On June 10, Zacks Investment Research downgraded Rock-Tenn Company RKT, manufacturer of consumer packaging products, to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Rock-Tenn has witnessed sharp downward estimate revisions after reporting second-quarter fiscal 2014 (ended Mar 31, 2013) results on Apr 28. Even though adjusted earnings improved 13% year over year to $1.27 per share, it fell short of the Zacks Consensus Estimate of $1.58 per share.

On Mar 31, the New York state legislature passed a new law that reduced the corporate income tax rate to 0 for some eligible firms, including RockTenn. While this will have a positive impact on earnings in the long term, this change caused to write off a previously negotiated Empire Zone tax credit associated with the Solvay mill that was earlier recorded as a deferred state tax asset. The impact of this item during the quarter was a charge of $10 million or 13 cents per share.

Including restructuring and other costs, earnings slumped around 74.6% to $1.13 per share from the prior-year comparable quarter. Total revenue also increased 3% year over year to $2,394 million but lagged the Zacks Consensus Estimate.

Shipments at the Corrugated Packaging segment declined around 2.7% or 50,000 tons to 1,810,000 tons from the year-ago quarter due to lower customer demand for containerboard and corrugated containers.

Rock-Tenn expects volumes increment, investment in box plants and the recent acquisition of Simpson Tacoma Kraft Paper Mill to aid sales growth. However, benefits from the improving sales environment will be offset by the estimated higher costs of recycled fiber, freight and commodities and the effect of the unplanned downtime in early April at the West Point mill.

Following the fourth quarter earnings announcement, the Zacks Consensus Estimate for fiscal 2014 has gone down 7.5% to $7.35 per share. Likewise, the Zacks Consensus Estimate for fiscal 2015 fell 3% to $8.89 per share.

Other Stocks to Consider
 
Better-ranked stocks in the paper and packaging industry include Compass Minerals International Inc. CMP, Crown Holdings Inc. CCK, and Graphic Packaging Holding Co. GPK. While Compass Minerals and Crown Holdings carry a Zacks Rank #1 (Strong Buy), Graphic Packaging sports a Zacks Rank #2 (Buy).