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Summary

  • On Thursday, July 24, Perry Capital noted that they believe several names in the paper and container board sectors have the potential to move considerably higher.
  • By converting to an MLP structure International Paper and Rock-Tenn could see their current valuations enhanced by as much 56% and 68%, respectively.
  • Recent trend behavior could improve during the second half of the year if both IP and RKT can meet and/or exceed analyst earnings expectations for the upcoming quarter.

Anytime a firm highlights a particular company or sector by coming out with a positive note, investors tend to pay a bit more attention to the companies in focus. That being said I wanted to not only highlight Perry Capital's recent thoughts on the potential for MLP conversion within the paper and container-board sectors but also note several of the reasons why I'm staying bullish on both International Paper (NYSE:IP) and Rock-Tenn (NYSE:RKT).

Perry Capital Thinks MLP Conversions Could Unlock Hidden Value

On Thursday, July 24, analysts at Perry Capital noted that they believe several names in the paper and container board sectors have the potential to move considerably higher. In their Q2 letter to shareholders the firm believes that "The management teams of several names in the paper and container-board sector(s) can create master limited partnerships for their paper mills in and by doing so could drive share prices much higher (to the tune of anywhere between 50%-and-100% higher)".

Based on its letter to shareholders, Perry Capital believes there would be upside of 50%-62% in terms of International Paper and upside of 62%-76% in terms of Rock-Tenn. Although I agree with Perry Capitals recent valuations, my valuations would actually fall within the mean of all three valuations. For instance, I see upside of 56% in terms of International Paper and upside of 68% in terms of Rock-Tenn.

#1 International Paper: On Thursday, shares of IP, which currently possess a market cap of $20.79 billion, a forward P/E ratio of 11.07, and a dividend yield of 2.92% ($1.40), settled at a price of $50.65/share. Based on a closing price of $50.65/share, shares of IP are trading 2.87% above their 20-day simple moving average, 5.90% above their 50-day simple moving average, and 10.15% above their 200-day simple moving average.

Although the above mentioned moving averages indicate that shares are currently in a buying mode for both near-term traders and long-term investors, I strongly believe shares have the potential to move even higher as the company gets set to announced its Q2 earnings on July 29 in which analysts' are expecting IP to demonstrate EPS of $0.83 on revenues of $7.35 billion.

In terms of the company's upcoming quarter, I'm looking for an 8%-to-15% increase in its operating earnings (as compared to Q1's operating earnings of $265 million or $0.61/share) and a 3%-to-5% increase in in its revenues (as compared to Q1's revenues of $7.01 billion) as stronger demand in both America and Europe should drive earnings higher.

#2 Rock-Tenn: On Thursday, shares of RKT, which currently possess a market cap of $6.88 billion, a forward P/E ratio of 11.08, and a dividend yield of 1.46% ($1.40), settled at a price of $103.08/share. Based on a closing price of $103.08/share, shares of IP are trading 1.85% above their 20-day simple moving average, 1.70% above their 50-day simple moving average, and 1.64% above their 200-day simple moving average.

Although the above mentioned moving averages indicate that shares are currently in a buying mode for both near-term traders and long-term investors, I strongly believe shares have the potential to move even higher as the company gets set to announced its FQ3 earnings on July 29 in which analysts' are expecting RKT to demonstrate EPS of $1.80 on revenues of $2.51 billion.

In terms of the company's upcoming quarter, I'm looking for a 20%-to-30% increase in its net income (as compared to FQ2's net income of $82.8 million or $1.13/share) and a 3%-to-5% increase in its revenues (as compared to FQ2's revenues of $2.39 billion) as severe weather won't impact earnings during FQ3 as much as it did during FQ2.

Conclusion

For those of you who may be considering a long-term position in either International Paper or Rock-Tenn, I'd actually look to keep a closer eye on any developments that may occur in terms of a potential MLP conversion. In terms of each company's upcoming earnings for the June quarter, I'd look for steady increases in both EPS and revenues as winter weather has now become a non-factor and increased demand at both company's should help full-year earnings growth.

Source: 2 Paper Stocks Worth A Look As MLP Conversion Is Once Again A Hot-Button Issue