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August 5, 2011 Dear friend,
We raised RockTenn to Neutral from
Underweight as it fell to $55, or below our $57 prior target. We raised our
2012 to 2014 earnings estimates in expectation of larger synergies, cost
savings after cap ex, lower interest expense and lower pension expense with
fuller funding. We raised our discount rate assumption to 8.75% from 8.00%,
which caused us to drop our price target to $53 from $57, as management
seemed to have "less of a grip" on merger planning than we expected. We had
assumed that some ex-Smurfit-Stone executives or good market intelligence
helped guide the planning, but our sense of the conference call was that the
RockTenn CEO was learning a few things about Smurfit-Stone's need for
improvements more than he bargained for. It is possible that antitrust
counsel prevented access to Smurfit-Stone until closing on May 27th.
We estimate $6 to $8 in RockTenn earnings in the 2012 to 2016 time horizon, but there is much "heavy lifting" ahead to meet those projections. Competitors will attempt to win RockTenn's customers or hire away salespeople, key employees could move on, IT systems must be integrated, some older plants will be rebuilt via cap ex, economic conditions may be favorable or unfavorable, and other uncertainties could cause bumps in the road. Thus, these executions of operating issues are key in order to harvest the "easy cost savings" from paying down debt to reduce future interest expense or funding pension plans to reduce future pension expense. A strong case for a $75 to $100 stock price exists, but the market will be very sensitive to third- and fourth-quarter results as evidence of customer retention, sales force retention and initial merger execution. Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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