Tuesday, July 21, 2009

International Paper (NYSE:IP): Upgraded to Buy at Deutsche Bank

Packaging/Paper group is on fire today after Packaging Corp. of America (NYSE:PKG) blew estimates away last night.

International Paper (NYSE:IP) looks to be the best play on PKG's results (up 15-16% pre mkt):

- Deutsche Bank is upgrading IP to Buy from Hold and upping their price target to $24 saying that while significant risks remain, it is clearer & clearer that the containerboard industry has managed itself in a fundamentally different fashion over the past year.

Prices reported in the trade papers have dropped $70-80/ton off last autumn's cyclical peak. However, prices were reported stable in June and appear stable again in July. Moreover, most industry players remain reasonably profitable at current price levels, despite a sharp drop in volumes. Industry consolidation, a proactive approach in managing supply & avoiding inventory overhang, and a weak US$ have all played a role in this performance. Additionally, domestic & export volume trends are recovering. June box numbers represented a first real sign of domestic vol’s starting to improve. This suggests that the improvement seen in the ISM survey and the industrial production index are starting to filter through to the box market.

Note Deutsche Bank is also upgrading PKG to Buy with a $24 target.

- Buckingham Research believes that PKG’s stellar EPS performance relative to expectations is a prelude to sizable beats by other containerboard producers including International Paper. They are reiterating their view that IP is well positioned to beat 2Q estimates and are raising their price target to $20 (prev. $18)

Firm reiterates their conviction that IP can meet or exceed their 2Q EPS estimate of $0.10, which is well above the breakeven consensus. IP has been taking disproportionate amounts of downtime (70% operating rates in 1Q09), and while they don’t think the variance with competitors will be narrowed too much in 2Q, at some point, if/when business improves further, it will be and IP will generate more incremental earnings power than others.

They consider $20 to be a conservative price target and believe the stock could go meaningfully higher if investors see renewed evidence of economic recovery.

Notablecalls: IP is trading around $17.50 in pre mkt (closed $16.49) and I suspect this one may have some more upside in it today. Traders will likely be gunning for the $18 level.

One other play people will be looking at is Temple Island (NYSE:TIN) which is also trading up 5-6% in pre market.

Note that DB and Buckingham are considered to be the strongest players in the Paper/Packaging field.


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