Inside the Market’s roundup of some of today’s key analyst actions
Expressing concern over containerboard pricing and believing its share price has been “slow to react” to negative industry trends, CIBC World Markets analyst Hamir Patel downgraded his rating for Cascades Inc. (CAS-T) to “underperformer” from “outperformer.”
“On Friday evening, PPW [Pulp & Paper Week] pointed to pricing pressure being ‘definitely in play’ across North American containerboard markets this month,” the analyst said. “While the trade magazine opted to hold steady its domestic benchmark prices (including the key linerboard grade to which most box prices are indexed), PPW’s contacts pointed to a few instances of deals being struck US$20-US$30/ton lower for medium in the West/Midwest, and reductions (albeit smaller) being offered for linerboard, too, in the Northeast as mills contended with less export orders. Although the linerboard discounting was largely for recycled product (which is all Cascades sells), the trade magazine indicated integrated producers worry about kraft linerboard discounting emerging in Q1 if box demand underwhelms (like it did in Q4 when the much-anticipated e-commerce boost failed to materialize).”
Believing domestic pricing for containerboard, which accounts for almost 70 per cent of Cascades' EBITDA, displays “signs of cracking given global growth concerns and rising North American capacity over the next few years,” Mr. Patel lowered his sum-of-the-parts multiple for containerboard.
His target for Cascades shares fell to $12 from $15. The average target on the Street is $14.67, according to Thomson Reuters Eikon data.
“Since the FBA and AF&PA released disappointing November containerboard statistics on Dec. 17, Cascades’ share price has fallen 6.9 per cent, only approximately half of the average 13.4-per-cent decline in U.S. containerboard equities (IP, PKG and WRK) over the same period,” said Mr. Patel. “The outperformance to U.S. peers is even greater when looked at over the last 12 months (16 per cent), six months (23 per cent) and three months (21 per cent). The latest stats pointed to ‘blended’ U.S. shipments being down 0.2 per cent year-over-year in November (with the year-to-date figure now up only 1.4 per cent) while U.S. inventories (2.561MM tons) rose 80K tons month-over-month, close to their highest level for the month since 2008. PPW’s trade contacts reported December volumes to date nationwide appear lower on a per-day basis than November.”
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At the same time, Mr. Patel said commodity price erosion has also made him more cautious toward Domtar Corp. (UFS-N).
"On Friday, PPPC’s ‘world-20’ statistics showed a global pulp market presently oversupplied for both softwood and hardwood, with China volumes having fallen 6.4 per cent month-over-month in November (down 10.7 per cent year-over-year). Earlier today, RISI also reported unabated pricing erosion in China where pulp buyers (traders and mills) have forced price cuts from suppliers given weak demand and ‘massive national downtime.’ At the same time, the trade magazine noted that many Chinese buyers have reduced purchase volumes, with some even declining their contracted purchase volumes over the past two months. RISI reported that some Canadian producers have concluded net NBSK [Northern bleached softwood kraft] prices as low as $700-$720 per ton. This failed to satisfy buyers who continue to push for further reductions given some domestic resale NBSK is reportedly selling as low as $680 per ton.
“Historically, pulp price movements in Asia have preceded price declines in North America. While pulp prices globally seem likely to continue to erode through Q1, the sell-off in Europe and North America will lag China, and may not be as severe, assuming prices stabilize in China by early Q2 and markets return to balance with spring maintenance outages. The long-term supply/demand fundamentals for pulp remain positive given the lack of new industry capacity until 2021.”
Keeping a “neutral” rating for Domtar shares, he dropped his target to US$47 from US$51. The average is currently US$51.73.
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Wedbush Securities removed Facebook Inc. (FB-Q) from its “Best Ideas List,” pointing to “investment price discipline.”
The firm maintained its “outperform” rating and US$220 target, which exceeds the average of US$192.62.
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In other analyst actions:
BMO Nesbitt Burns upgraded Spin Master Corp. (TOY-T) to “outperform” from “market perform” with a target price of $44, rising from $40. The average target on the Street is $58.90.
Raymond James analyst Johann Rodrigues raised Automotive Properties Real Estate Investment Trust (APR.UN-T) to “outperform” from “market perform.”
David Leeder