The S&P Paper Packaging industry subindex trailed the market slightly in 2003, rising 26.2%, vs. a 27.4% gain for the S&P 1500. The subindex has continued in positive territory thus far in 2004, recording an increase of 3.8% through June 10, vs. a 2.4% climb for the 1500.
SPRINGING BACK. In mid-June, the American Forest & Paper Assn. reported that the operating rate for U.S. containerboard facilities -- the percentage of available production capacity under use -- stood at 97.5% in May, up from 94.3% in April. And another industry benchmark was encouraging: Average-week shipments of cardboard boxes were up 6.2% in May from a year earlier, though down from the April level.
These healthy statistics, coupled with S&P's projection that real gross domestic product will grow 4.8% in 2004, point to improved pricing and demand levels for containerboard, in our view.
And that's good news for an industry just starting to pull out of a slump that started as U.S. manufacturing began to slow in October, 2000. With the domestic economy falling into recession in 2001 and a strong U.S. dollar attracting imports of corrugated boxes, most industry players faced a large reduction in demand for corrugated packaging and a big drop in shipment volume.
However, we believe group members acted prudently in 2000 through 2003, with extensive amounts of plant downtime stopping any major downturn in pricing. In fact, 3.9 million tons of containerboard capacity were shut down from 2000 to 2003.
FOLLOWING THE MARKET. With well-controlled production, and as demand firmed slightly, prices for containerboard began to climb in 2002. However, with demand uneven, list prices for linerboard and corrugating medium declined, hitting low points in December, 2003, and again in February, 2004, before turning higher again by March, 2004.
Because packaging demand typically picks up with the economy, we expect corrugated markets to mirror general economic performance, with demand and prices continuing to strengthen in coming quarters - they should peak in mid-2005, in our view. And the trend may be visible in spot pricing for the industry benchmark grade of containerboard -- 42-pound unbleached kraft linerboard -- which rose to between $400 and $410 per ton in a key U.S. market on June 14, up from a recent low of $375 to $385 on May 3. Industry consolidation has also aided profitability, in our view, by reducing production capacity.
Our favorite names in the group include Smurfit-Stone Container (SSCC
; recent price, $19), which carries S&P's highest investment recommendation of 5 STARS, or buy. We have a $23 12-month target price on the stock. We also like Packaging Corp. of America (PKG
; $23.70), ranked 4 STARS, or accumulate. Our 12-month target price on that stock is $28. Analyst Korutz follows shares of paper, packaging, and forest-products companies for Standard & Poor's Equity Research Services