Verso Paper (NYSE:VRS): Upgraded to Outperform at Credit Suisse, $6 target established

Credit Suisse is making an interesting call on Verso Paper (NYSE:VRS) upgrading the little name to Outperform from Neutral and establishing a $6 price target (prev. $3.50).

Firm says they believe that many of the recent headwinds Verso has faced are beginning to subside and see multiple upcoming catalysts to the stock. In addition, they believe that the market is ignoring the upside leverage tied to recently announced price increases.

Storm Clouds Parting: Over the last month, Domtar Corp. (UFS, $73.03, OUTPERFORM [V], TP $84.00) has announced the closure of its Columbus, MS coated paper mill, which will help tighten up supply. Also, coated groundwood inventory levels are now at low levels and retail sales (which are a pre-cursor to advertising expenditures) have jumped in recent months.

In March, average same store sales jumped by 8.7% according to Retail Metric Inc., better than consensus estimates. This jump may prelude advertisement expenditures, which are a major driver of coated paper demand. Should retail sales continue to remain strong through the spring and summer periods, the firm believes that advertiser will “wake up” and realize they must advertise this Christmas as the consumer goes back to the mall.

Finally… Coated Prices May Increase: After watching coated paper prices fall steadily since late 2008, manufacturers have announced a $30/ton price increase effective April 1st. Given the low inventory levels for coated groundwood, recent price increases in Europe, improving retail sales and Domtar’s mill closure, CSFB has increased confidence that most or all of this price increase will stick, and that further increases may be on the horizon.

Don’t Forget Pulp: With pulp prices continuing to increase, Verso is poised to benefit in multiple ways. First, and most directly, Verso sells pulp on the open market, directly benefiting from higher prices. Second, marginal producers of coated paper (mainly located in China and Europe) buy pulp on the market. Therefore, as their costs rise, non-integrated producers must either have to realize higher pricing in the near-future, shutter capacity or both, which would help Verso continue to achieve better price realizations.

Raising Estimates
Credit Suisse is raising their EPS estimates for 2010 through 2013 and their belief that the coated market is beginning to tighten up and coated paper demand may be better than they were previously modeling:

Cheep on Risk Adjusted Valuation: Assuming just 6.1x CSFB Peak (2013) EPS estimate of $1.65 (expected in late 2012) and discounting back 1 ½ years at a 41% rate, CSFB reaches their $6.00 one-year (2Q 2011) target.

Notablecalls: Interesting little paper/pulp play which I'm sure will go nuts on this upgrade.

Credit Suisse's Paper Products team produced a 20% move in Lousiana-Pacific (LPX) and I would expect similar action in Verso. The logic is pretty much similar. CSFB expects the co to earn $1.65 in EPS by late-2012, which means it will be a $16 to $20 dollar stock in 2011. Provided everything goes the way CSFB expects. That will generate interest.

I suspect this one will be up 10-15% today, putting $4.40 level in play.