Deutsche Bank: 2013 outlook for paper and packaging cautiously optimistic, survey says, although printing/writing paper market expected to remain weak

Submitted by: The Two Sides Team February 19, 2013

Deutsche Bank outlook survey cautiously optimistic.

The 2013 outlook survey says….

Earlier this month, DB polled paper and packaging executives on their outlook for 2013. We received 100 responses. They provide clues around industry expectations for prices, costs, volumes, capital spending & profitability in 2013. Once again, participants were asked, "What is Wall Street Missing?," as well as opinions regarding the "best managed" companies in the industry. After its success in integrating Temple-Inland, International Paper displaced Packaging Corp. for the top spot on our survey.

Cautious optimism for improving volumes
Outside the printing and writing paper market, there is cautious optimism about 2013 volumes. Most expect volumes to be flat/up 2% y/y. 61% of respondents expect positive box volumes (similar to last year's expectation. For market pulp, 51% of respondents expect volumes to be up y/y while 38% expect demand to be flat. In paperboard, the general expectation is for volumes to be flat/up 1% y/y. To no surprise, printing and writing paper volumes are expected to remain weak: more than half of respondents expect negative demand trends.

Most players expect rising costs and rising prices
More than half of respondents expect input costs such as freight, plastic resins, wastepaper, caustic soda and pulpwood to increase from current levels. The trade appears relatively optimistic about prices for wood products and paperboard grades. While some expect market pulp prices to fall, 62% expect prices to increase from current levels. Given the pessimism about printing and writing volumes, it is not surprising that most respondents suggest that newsprint, uncoated freesheet and coated paper prices will remain flat or decline.

Digging deeper on containerboard and boxes
Expectations for box demand in December '11 and January '12 were on average in the flat to 2% y/y range (see Question 6). Demand is considered the 'most important' determinate of containerboard and box prices. The US$ and exports were viewed as least important. Looking at 2013, 76% of our respondents expect containerboard and box producers to attempt a price increase, with 23% forecasting success. Among our coverage, this would be most positive for RockTenn, International Paper, Packaging Corp. and KapStone. Boise (BZ-not covered) also has exposure to containerboard.

What is Wall Street missing?
Most respondents believe Wall Street is not fully accounting for higher costs such as those related to healthcare reform, labor and taxes. A number of observers suggest that Wall Street does not fully appreciate impact of industry consolidation (see Question 10).

Valuation & Risks
We use various methods to value the stocks, including PE, P/Book and EV/EBITDA. Based on our '13 estimates (which do not include a 2013 containerboard price hike), paper companies appear to be trading at the mid/high range of their historical averages (current -13 EV/EBITDA mean = 6.5x). The primary risks involve momentum in the economy, the health of demand and input cost inflation (energy, chemicals and freight).

This article, written by Mark Wilde, originally appeared on the IndustryIntel i2 dashboard.

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