Aracruz Paper Outlook Wrinkled

We are reiterating our Sell recommendation on Aracruz Celulose S.A. (ARA). The international outlook for pulp and paper prices is uncertain due to the current global financial crisis. The difficult economic environment in the U.S. and Europe resulted in a decrease in pulp's list prices all over the world.

Fourth quarter results were disappointing based on the huge derivative losses. The merger with VCP is a step in the right direction; however, the way the deal was done raises some concerns. Finally, the higher leverage and the suspension of the Guaíba, Veracel, and Minas Gerais expansion projects will prove to be negative for the company.

All considered, we are keeping our current Sell recommendation on Aracruz, and we expect the shares to trade at a target price of US$5.50 at a P/E ratio around 12x our 2009 earnings estimate, still with a small premium to the market median.