Pactiv Corp: Penny Pinching Despite Increasing Resin Prices

Being the no.1 or no.2 in your market can carry a premium. Though inflation seems to be all around these days, Pactiv Corp (PTV) does not plan price increases in 2007 as it fears that a stressed out middle class might shift towards cheaper off-brand names.

There is no waste in the waste bag manufacturing. Penny pinching is the name of this game. PTV has been able to cover nearly $300M in annual resin increases, primarily through improved manufacturing and distribution. Now that technology and plant upgrades have done their part, it is all up to the price of resin. Every $0.01 movement in cost is $0.046 in earnings (per share). Our assumptions for 2007 are based on PTV's stance on maintaining current wholesale prices.

The following synopsis for future resin pricing depicts a flat to slightly higher price range to the end of the year. Basically, most if not all the increase has already occurred.

Polyethylene

Polyethylene producers have been determined to raise resin prices while processors have shown strong resistance to the $.13/lb of price increase nominations floated since December. Processors won out in January, as weak domestic demand could not support early/mid month gains, then producers, leaning on a robust export market, gave it another go in February. Even in the face of falling feedstock, producers have managed to move spot resin prices higher and will record on average $.03/lb price gains for February contracts.

Generic Prime Polyethylene film grade resins are still relatively scarce in the spot market, although we have seen a steady flow of off grade, particularly lower quality cars, at discounted prices. LLDPE Hexene and Octene have been very difficult as has been LDPE High Clarity. HDPE Blow Molding resins have been more available and we have seen pretty good volumes of HDPE come through our market. While acknowledging the higher price level and upward momentum in the market, resellers are cautious about building inventories at these levels.

We expect Producers to take a strong stance once again in early March as they look to secure the second half of their $.06/lb increase – and do not forget there is another $.07/lb already out there. However, even given excellent export markets, it would be quite impressive if the market can continue much higher without a major boon in domestic demand.

Source: http://www.ides.com/

Polystyrene

The Polystyrene market has hard a hard time rallying along with the other commodity grade resins. While producers have been able to maintain a stable market there has been very little follow though to higher contract prices. Polystyrene production continues to be tough business. After a couple of uneventful price increase attempts, producers will give it another shot as they look for an additional $.04/lb in March.

All important Benzene prices remain elevated, with a recent rally bringing prices back up to $3.60/gal. Continued cost pressures keep operating rates in check as producers look to control surplus supplies from developing. While there has not been an overwhelming flow of spot resin, railcars of good off grade HIPS have been available in the high 60s, and good GPPS a couple cents lower. Producers would like to see Generic Prime prices edge into the $70s.

Source: http://www.ides.com/

Polyethylene and polystyrene prices are crucial components in PTV's performance. Revenue, on flat pricing, is expected to increase by 3.2% in 2007 and estimated earnings are $1.88.

PTV may choose to apply a portion of an estimated free cash flow of $222M towards financing a $300M pension deficit. We expect PTV to continue repurchasing stock, albeit to a lesser extent than in 2006 (net -4.35M shares).

PTV 1-yr chart

Disclosure: None. The CrossProfit evaluation line is based on a non inflationary environment, both in resin cost and sales.