On Nov 21, Zacks Investment Research downgraded Rock-Tenn Company (RKT) to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Despite reporting record earnings per share of $2.66 in the fourth quarter on Nov 4, earnings estimates of Rock-Tenn Company underwent sharp downward revisions due to a tempered volume outlook and concerns regarding the negative impact of cost headwinds and maintenance outage on 2014 results. concerns regarding the negative impact of cost headwinds and on 2014 results.
The 91% year-over-year growth in earnings in the fourth quarter was driven by strong operating performance, higher pricing and continued productivity improvements, partially offset by higher commodity costs.
To add to its woes, shares of the Norcross, GA-based leading manufacturer of corrugated and consumer packaging and recycling solutions in North America, which had otherwise been enjoying a run above the $100 mark, has dropped to an average of $95 since the earnings release.
OCC (Old Corrugated Containers) prices are reported to be flat to down $5/ton in November. With a direct exposure to OCC prices, Rock-Tenn will be able to realize another price hike only if there is a sizeable increase in OCC prices.
Rock-Tenn will reduce its current mill production to meet current customer demand at several of its other facilities, and is expected to increase production back to normal levels banking on improving customer demand. The company has scheduled major maintenance outages at its Florence and Fernandina Beach mills in the December quarter. This will impact results in the next quarter.
Following the fourth quarter earnings announcement, the Zacks Consensus Estimate for 2014 for Rock-Tenn has gone down 9% to $8.55 per share. Likewise, the Zacks Consensus Estimate for 2015 fell 7% to $9.66.
Other Stocks to Consider
Other stocks with favorable Zacks Rank in the paper and packaging industry include KapStone Paper and Packaging Corp. (KS), with a Zacks Rank #1 (Strong Buy), and Domtar Corp. (UFS) and Orchids Paper Products Co. (TIS), both carrying a Zacks Rank #2 (Buy).