April 4, 2011 - Rock-Tenn Company (RKT-NYSE) manufactures and sells packaging products, recycled paperboard, containerboard, bleached paperboard, and merchandising displays worldwide. The company's Consumer Packaging segment offers folding cartons for packaging applications; express mail envelopes for the overnight courier industry; coated recycled and bleached paperboard for folding carton and other paperboard product manufacturers; and market pulp. This segment employs printing technologies, and supports customers with new product development, graphic design, and packaging systems services.

Rock-Tenn's Merchandising Displays division produces temporary and permanent promotional point-of-purchase displays for consumer products companies; offers contract packing services; and produces lithographic laminated packaging.

Its Specialty Paperboard Products segment sells specialty recycled paperboard to solid fiber interior packaging, tube and core, and other paperboard product manufacturers; produces gypsum paperboard liner; and converts specialty paperboard into book cover and laminated paperboard products for use in furniture, automotive components, storage, and industrial products. This segment also offers fiber partitions, such as solid fiber partitions for glass container manufacturers and producers of beer, food, wine, spirits, cosmetics, and pharmaceuticals; die-cut paperboard components; and specialty agricultural packaging for fruit and vegetable markets, and sheeted separation products, as well as sells recovered paper to paperboard, tissue, newsprint, roofing product, and insulation manufacturers. Rock-Tenn was founded in 1936 and is headquartered in Norcross, Georgia.

Rock-Tenn's stock has shown solid improvement over the last 2 years. Going from a low of $22.80 in March of 2009, it moved consistently upward and recently reached an all-time high of $74.30. It's off that a little now but with a healthy jump in earnings forecast, that level could be easily exceeded.

While earnings took a slight drop in 2010 to $4.43 a share (down from $4.64 in 2009), analysts like the shape of this year, predicting $5.97 (consensus estimate from 4). For 2012, they see $7.71 (with a range of $7.09 to $8.50). Next earnings will be out April 26, showing first quarter results. Expect $1.26 compared to 70 cents in the first period of last year. For the second quarter, look for $1.43 vs $1.14 in last year's second.

One concern for investors is the new mix of revenues that will occur once the deal is done. Currently RKT makes most of its boxes and containers for food and beverages, a fairly constant demand. Smurfit-Stone, in contrast, is more engaged in containers for industrial and consumer goods, business to business packages, and large retail goods. That would make the new entity's revenues 76% from corrugated packaging instead of the 26% it currently generates. That would make sales more sensitive to economic cycles.

Essential numbers: Market Cap is $2.74 billion. Forward P/E is 9. Price to book value is 2.56. Book value is $27.13. Operating margin for the last 12 months was 12.28%. Profit margin was 7.75%. Return on asets was 8.30%. Revenues were $3.07 billion for the last year. Total cash is $10 million or 25 cents a share. Total debt is $1.07 billion. Current ratio is 1.11. Beta is 1.11. In the last 52 weeks, the stock is up 47.90%. There are 39.40 million shares outstanding with a Float of 37.57. Insiders own 6.07%. Institutions have 83.40% of the Float. There is an annual dividend of 80 cents for a yield of 1.2%.

Most investors will want to wait for the outcome of the shareholders' vote on the acquisition of Smurfit-Stone by Rock-Tenn. If it goes through, earnings will benefit immediately. But some investors may find the leverage a little too high here for their comfort, and if the purchase goes through, the new sensitivity to economic cycles. Still, valuations are very reasonable here, especially for a company that appears to be on the verge of boosting profits notably.

- Company Website: www.rocktenn.com