Updated with closing prices.
NEW YORK (
) -- In this case, it looks like the third time wasn't the charm.
Shares of the paper and packaging companies were weak on Monday following news that a containerboard price increase instituted in August, the industry's third since the start of the year, hasn't stuck.
According to Deutsche Bank, industry periodical
Pulp & Paper Week
, revised published prices for August lower late on Friday with the editors citing "price concessions by small producers and an inability to raise corrugated box and sheet prices." The firm said the "abrupt shift" in the published price to $640/ton from $680/ton was a surprise, and quickly slashed its earnings estimates for the group.
"If one assumes that 2011 average prices will now be $40/ton lower, $1.4B [billion] in prospective 2011 EBITDA [earnings before interest, taxes, depreciation and amortization] has vaporized," Deutsche Bank said. "Use a 6-7X multiple on that EBITDA, the hypothetical valuation implications are impressive."
The group was hit hard by the news with
(IP - Get Report)
closing down 6.4% at $21.97 with volume of 20.3 million running at nearly three times the issue's daily average churn of around 7 million;
off 5.9% to finish at $18.90;
Packaging Corp. of America
(PKG - Get Report)
losing 4.8% to $23.19;
falling 5% to $6.92;
, tumbling 4.7% to $50.00; and
Smurfit-Stone Container Co.
sliding 2.8% to $19.78.
Deutsche Bank made slight revisions to its earnings estimates for the rest of fiscal 2010, saving the bigger cuts for fiscal 2011 and adding that it would review its price targets for the stocks over the next few days. To give an example of the depth of the cuts for fiscal 2011, the firm dropped its EPS view for International Paper by 18% to $2.55 from its prior estimate of $3.10.
The current consensus estimate according to
is for a profit of $2.66 a share, so the firm was already on the high side of expectations.
"DB [Deutsche Bank] had estimated that c'board [containerboard] price would peak at $690/ton in Sept/Oct. and avg. $665/ton in 2011," the firm said. "Given that the third price hike now appears to be dead, we are cutting our estimates to $640/ton for the remainder of FY'10 and $620/ton for FY'11."
The firm still has buy ratings on the companies it covers in the group, and said that, even without the the third hike, the containerboard companies were trading at low multiples relative to historical averages.