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Goldman Sachs Comments on MLP Chatter in US Paper and Forest Products Sector (IP) (RKT) (PKG) (GPK) (MWV)

July 25, 2014 11:31 AM EDT
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Price: $34.94 -3.88%

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Goldman Sachs analyst Alex Ovshey commented on talk of MLP of domestic virgin containerboard mills. Shares of International Paper (NYSE: IP) KapStone Paper and Packaging (NYSE: KS), RockTenn (NYSE: RKT), and Packaging Corp. of America (NYSE: PKG) climbed yesterday in related news following comments from Perry Capital (link). In the view of analyst Ovshey, companies engaged in the production of virgin fiber based pulp and paper (including virgin containerboard and boxboard, and uncoated freesheet (UCFS)) could potentially meet the “qualifying income” criteria.

"Per section 7704(d)(1)(E) of the IRS code – the term “qualifying income” for an MLP includes income derived from the processing, refining, or marketing of any mineral or natural resource (including Timber). While we do not take a view on whether the IRS would grant a favorable private letter ruling (PLR) to any of our covered Paper companies that choose to pursue one, based on our knowledge of the paper production process, we believe companies engaged in the production of virgin fiber based pulp and paper (including virgin containerboard and boxboard, and uncoated freesheet (UCFS)) could potentially meet the “qualifying income” criteria," said Ovshey.

"We see the key benefits to moving assets into an MLP structure, as (1) higher cash flows, as MLPs do not pay federal income tax, (2) capital allocation discipline as majority of cash flows are distributed, and (3) a valuation premium vs. C corp. given the two factors above. Key risks to consider for an MLP structure include (1) potential under-investment in growth opportunities, (2) tax leakage, (3) tax law changes, (4) concentration risk, (5) financing restrictions, and (6) technical factors," he continued.

"We believe paper-based packaging companies, specifically exposed to virgin containerboard and boxboard, would be most suited to potentially consider moving to an MLP structure given highly consolidated market structures, significant exposure to stable food and beverage end-markets, and strong margin and FCF characteristics. We also note that declining D&A expense and elevated cash tax rates for some producers (i.e., IP) provide an incentive for producers to look into an MLP structure, in our view. Virgin paperboard producers in our coverage include: IP (Buy), RKT (Buy), PKG (Neutral), GPK (Buy), and MWV (NYSE: MWV) (Neutral). Domtar is exposed to UCFS, and softwood and fluff pulp," added the analyst.

For an analyst ratings summary and ratings history on International Paper click here. For more ratings news on International Paper click here.

Shares of International Paper closed at $50.65 yesterday.



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