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Analyst Blog

On Apr 1, 2014, we initiated coverage on North America's leading integrated corrugated and consumer packaging manufacturer Rock-Tenn Company (RKT - Analyst Report). Rock-Tenn’s first-quarter fiscal 2014 (ended Dec 31, 2013) earnings jumped 23% year over year to $1.66 but fell short of the Zacks Consensus Estimate of $1.73 per share. Total revenue increased 3.3% year over year to $2,362.6 million, but missed the Zacks Consensus Estimate. The year-over-year sales growth was driven by higher pricing, partly offset by reduced volume.

Lower customer demand for containerboard and corrugated containers led to a 3.6% decline in shipments at the Corrugated Packaging segment. In the quarter, Rock-Tenn took 250,000 tons of downtime in its Corrugated Packaging segment including 157,000  tons of economic mill downtime. Rock-Tenn operated its mill system at a 90.4% operating rate, the lowest rate in at least 2 years. This ultimately led to an inventory reduction of 12,000 tons. The financial impact in Rock-Tenn’s first quarter was estimated at $22 million. Rock-Tenn has taken 25,000 tons of downtime during the second quarter.

Moreover, inclement weather on the East Coast has had a pre-tax negative impact of $30 million or 40 cents per share in the second quarter of 2014. The company indicated that the harsh winter weather negatively impacted energy, freight and fiber costs, as well as reduced shipments and increased maintenance and labor costs. Old corrugated container (OCC) prices have been on the rise and if its increases further, it will erode Rock-Tenn’s margins unless there is a commensurate price increase to pass it on to customers.

Estimates for Rock-Tenn have thus suffered negative revisions over the past 60 days, with 7 of the 8 estimates going down. The Zacks Consensus Estimate for 2014 has gown down 2.5% over the 60 day time frame and currently stands at $7.95. The Zacks Consensus Estimate for the second quarter of fiscal 2014 is pegged at $1.65, reflecting 47.52% year-over-year growth.

Other Stocks to Consider

The stock currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include KapStone Paper and Packaging Corporation (KS - Snapshot Report), Neenah Paper, Inc. (NP) and Resolute Forest Products Inc. (RFP - Snapshot Report), all of which hold a Zacks Rank #1 (Strong Buy).
 

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