Rock-Tenn Profits on Paper: Under the Radar

NORCROSS, Ga. (TheStreet) --Cardboard and envelopes might not seem like money makers, but Rock-Tenn(RKT Quote) has been turning paper into big profits for shareholders.

One would expect paper products to generate low margins. After all, this low-tech business relies on volume to profit. However, operating margins for Rock-Tenn have climbed from the high teens to nearly 30% in the most recent quarter as revenue rebounded from the second quarter.

Major competitors to Rock-Tenn, such as International Paper(IP Quote) and Avery Dennison(AVY Quote) have posted net margins of 3% to 4% because of weak prices. While Norcross, Ga.-based Rock-Tenn had comparable margins in 2008, the company has improved its operations, causing its margin to expand to 9.2% in the most recent quarter.

Rock-Tenn's revenue fell 7% to $729 million during the company's fiscal fourth quarter from the year-earlier period. But that's up from 7% from March, when sales sank to $676.3 million. In August, the company said it would increase prices on recycled paperboard.

This improvement suggests that added output is coming in after the company has covered existing fixed costs, resulting in a much higher margin on the additional sales.

Rock-Tenn's stock has gained 32% annually, on average, during the past three years, as International Paper and Avery Dennison shares lost value.

Rock-Tenn's stock has risen 40% this year, outperforming Avery Dennison's shares but trailing behind those of International Paper. While International Paper shares have more than doubled, its price-to-earnings ratio climbed to 20. Rock-Tenn has maintained a multiple of 9 despite its run-up.

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