Deutsche Bank Upgrades KapStone (KS) and Packaging Corp (PKG) to Buy
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Deutsche Bank upgraded KapStone Paper & Packaging (NYSE: KS) from Hold to Buy with a price target of $23.00 (from $15.00). Packaging Corp. (NYSE: PKG) was raised from Hold to Buy with a price target of $90 (from $77). Analyst Debbie Jones raised containerboard estimates on likelihood of price hike success.
"Although in our view market trends don’t necessarily imply a hike should go through, it is clear, however, that fundamentals have improved and it seems that more disciplined producers (post industry consolidation) could increase now rather than risk margin deterioration as business gets re-bid and/or new supply enters the market in late 2017 and 2018," said Jones.
Discussing KapStone the analyst said, "The outlook for KS has significantly improved over the last few months. Not only are containerboard domestic prices apt to increase, but export prices and kraft paper prices appear to be stabilizing. While KapStone remains a bit of a show me story in terms of operational consistency, the potential earnings trajectory is much improved. Based our valuation, we rate KS a Buy."
On Packaging Corp, Jones added, "In addition to the containerboard price hike (we model a $40 increase), we believe PKG has several levers to improve volumes and margins over the next two years including the integration of TimBar (closed 8/29/16), the continued rampup of DeRidder's PM 3 (which is now targeting heavier, higher-margin grades) and a healthy balance sheet to pursue attractive capital projects and potential M&A opportunities. PKG is arguably the best managed domestic containerboard company. Its asset base is well capitalized, with significant exposure to higher-value kraft mill assets (vs. recycled mill assets). As a ~10% market share player in containerboard & corrugated packaging, PKG should continue to enjoy 'freerider' status while still maintaining a system large enough to service national accounts. We believe the current share price offers an attractive entry point. Thus, our rating is Buy."
Shares of KapStone Paper & Packaging closed at $19.21 yesterday.
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