Rock-Tenn Company

Rock-Tenn Co. finds its pricing power as demand for paper products remains strong. The company has already raised prices four times in 2008. It recently closed on the acquisition of Southern Container Corp. which will give the company dominance, especially in the containerboard and corrugated packaging segments. Rock-Tenn is operating on all cylinders. The company has surprised on consensus estimates in all of its last four quarters by an average of 9.83%.

Full Analysis

Rock-Tenn Company (RKT - Snapshot Report) manufactures packaging products, bleached and recycled paperboard and merchandising displays. The company has 92 facilities located in 26 states, Canada, Mexico, Chile and Argentina.

The company, a Zacks #1 Rank (Strong Buy), has four divisions: Packaging Products, Paperboard, Merchandising Displays and Corrugated. The Packaging Products segment produces folding cartons and solid fiber interior packaging. The Paperboard segment collects recovered paper and manufactures recycled clay-coated and specialty paperboard, including gypsum paperboard liner, 100% corrugating medium, bleached paperboard and laminated paperboard products.

The Merchandising Displays segment produces temporary and permanent point of purchase displays. The Corrugated segment manufactures corrugated packaging to sell to industrial and consumer products manufacturers and corrugated sheet stock for sale to corrugated box manufacturers.

On Jan 23, the company announced first-quarter earnings and surprised by five cents, or 10.87%. RKT reported net income of $17.5 million, or 46 cents per share, for the first quarter compared to $15.1 million, or 39 cents per share, for first-quarter 2007.

Net income, adjusted for restructuring and other costs primarily related to the closing the Chicopee, Massachusetts folding carton plant, came in at 51 cents per share. Analysts expected 46 cents a share.

Sales increased 11.7% from a year ago to $596.3 million from $533.9 million.

"Strong sales growth in our consumer packaging, corrugated packaging and merchandising display segments drove our 27.5% increase in adjusted net income per share. Operating efficiencies flowing from our commitment to performance excellence in our consumer packaging segment enabled us to achieve the return on sales target of 5% that we established when we acquired the Gulf States assets in 2005." said James A. Rubright, Rock-Tenn Company Chairman and Chief Executive Officer.

Rock-Tenn announced on March 5 that it had completed its acquisition of Southern Container Corporation. Southern Container manufactured containerboard and corrugated packaging. With the acquisition, Rock-Tenn becomes the eighth largest manufacturer of containerboard in North America. The company financed the acquisition with $1.4 billion in new financing, including $1.2 billion in new senior secured credit facilities and $200 million of 9.25% senior notes due 2016.

The company is finding pricing power in this economy. It continues to increase prices. In the first three months of 2008, RKT announced four price increases on uncoated and coated recycled paperboard, bleached paperboard, and millennium grades of recycled paperboard.

Brokerage analysts are optimistic about the second quarter and full year. Two out of three covering analysts raised consensus estimates for the second quarter by one cent to 69 cents from 68 cents a share in the last 30 days. For the full year 2008, two out of three analysts raised consensus estimates in the last 30 days by 10 cents to $2.73 from $2.63 per share.

Rock-Tenn has a P/E of 11.29. Its price-to-book is 1.94. Covering analysts are estimating year-over-year growth of 25.96% in 2008, stronger than the estimated industry growth forecast of 19.8%.