All About The Paper: Packaging And Paper Stocks Get An Upgrade

Paper stocks are rallying after BMO Capital Markets upgraded International Paper Co IP and Packaging Corp Of America PKG to Outperform from Market Perform on stronger-than-expected market conditions in containerboard and pulp prices.

The brokerage also boosted the price target on the shares of International Paper by $12 to $62 and Packaging Corp. by $11 to $100. BMO also raised the price target on KapStone Paper and Packaging Corp. KS shares to $28 from $24, while maintaining an Outperform rating on the stock.

The brokerage expects producers to announce a $50/ton spring containerboard price hike over the next three to four weeks.

“Containerboard fundamentals have improved markedly over the past 10 weeks,” analyst Mark Wilde wrote in a note.

News In The Space

Wilde noted that the Monday’s unexpected idling of International Paper’s Pensacola, Florida, mill (500,000/tpy capacity) could further tighten up the market.

In addition, Wilde boosted his fluff pulp price assumption by $25—30/mton in 2017 and $50–60/mton in 2018.

Further, the analyst now expects International Paper to generate $370 million in 2017 EBITDA and 4 percent EPS accretion from its recent acquisition of Weyerhaeuser Co WY's fluff pulp business, higher than his prior estimate of $307 million in EBITDA and 1 percent EPS accretion.

International Paper is set to report its fourth-quarter results on February 2. Wilde, who sees quarterly EPS of $0.70, also raised his FY 2017 EPS estimate to $3.80 from $3.65 on higher pulp prices as well as flat containerboard prices.

On Packaging Corp., Wilde said the company is well hedged against any spikes in OCC and natural gas due to its less than 20 percent exposure to recycled containerboard.

“The recent TimBar as well as the Columbus Container acquisitions provide EBITDA runway for PKG. At 94 percent, PKG integration is the highest amongst its large peers and sports among the highest EBITDA margins in the sector,” Wilde continued.

The analyst also noted that the company’s healthy leverage at 2.1x provides room for further growth via M&A.

Analyst's Actions

That said, Wilde trimmed his fourth-quarter EPS estimate by a penny to $1.16 on modest erosion in uncoated free sheet prices. 

However, his 2017 EPS estimate of $5.80 remains unchanged. Packaging Corp will release its fourth-quarter results on January 30.

Paper On The Move

Following the upgrade, shares of both International Paper and Packaging Corp. of America set new 52-week highs of $57.84 and $95.50, respectively. KapStone also touched a new 52-week high of $24.69, while Domtar Corp (USA) UFS is flirting with its 52-week high of $42.95.

At last check:

• Domtar gained 4.20 percent to $42.69.
• International Paper had risen 3.40 percent to $57.80.
• KapStone were up 3.75 percent to $24.63.
• Packaging Corp. had climbed 2.23 percent to $94.13.
• Weyerhaueser shares were up 3.31 percent at $32.16.