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Rock-Tenn Co.

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Rock-Tenn Co. (RKT) reported revenue growth of 67% in its fiscal third quarter thanks in part to last year’s acquisition of Smurfit-Stone, which should keep it poised for even more growth moving forward. With low valuation metrics, including a low price-to-sales (P/S) ratio of 0.6, this Zacks #1 Rank (Strong Buy), paper and packaging company is a compelling value pick.

Fiscal Third Quarter

On July 24, Rock-Tenn posted a third-quarter fiscal 2012 profit of $58.2 million or 81 cents per share, compared with a loss of $30.1 million or 60 cents per share a year-ago. The results were boosted by a solid double-digit growth in sales.

Adjusted earnings (excluding items) of 95 cents per share, however, missed the Zacks Consensus Estimate of $1.02. The company had to contend with higher costs and a supply outage in its corrugated packaging business during the quarter.

Revenues soared 67% year over year to $2.3 billion, buoyed by last year’s acquisition of leading paperboard maker Smurfit-Stone. The $3.5 billion acquisition has reinforced Rock-Tenn’s corrugated packaging business and helped it to boost its market share in the profitable containerboard and corrugated business.

The company witnessed growth across the board in the quarter with sales from the core Corrugated Packaging division more than doubling year over year to $1.5 billion, driven by the Smurfit-Stone buyout. Growth was also witnessed across the Consumer Packaging and Recycling and Waste Solutions divisions.

Rock-Tenn will report its fourth quarter results after the closing bell on November 1. In its third quarter commentary, the company said it expects earnings of roughly $1.35 per share for the fourth quarter. Analysts polled by Zacks are currently expecting earnings of $1.37 on an average.

Earnings Momentum on the Move

The Zacks Consensus Estimate for fiscal 2012 is up 0.4% in the past 30 days to $4.47 per share, as five of 10 estimates were revised upward. As for fiscal 2013, seven estimates out of ten have lifted the Zacks Consensus Estimate by 13.6% to $7.27 per share, representing an estimated year over year growth of 62.6%.

A Value Stock

Rock-Tenn has plenty of reasons to be labeled a value stock. In addition to having a low P/S, the stock has an attractive forward P/E ratio of 10.0. It also has a low price-to-book (P/B) ratio of 1.5. (A P/S ratio lower than 1.0, a P/E below 15.0 and a P/B ratio under 3.0 generally indicate value.) Moreover, the company has a 1-year ROE of 10%, which is higher than its peer group average of 4.8%.

The stock has performed reasonably well so far this year, generating a year-to-date return of roughly 25%.

Founded in 1936, Rock-Tenn Co. is among the leading integrated manufacturers of corrugated and consumer packaging and recycling solutions in North America. The company has emerged as the second-largest maker of containerboard in North America following the Smurfit-Stone acquisition. Rock-Tenn, which has a market cap of roughly $5.1 billion, operates in more than 240 locations across the U.S., Canada, Mexico, Chile, Argentina and China.

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