Rock-Tenn Earnings Are Soft, but Its Valuation Looks Solid

According to Yahoo! Finance, some 25,800 employees earn their livelihood at the "box company" Rock-Tenn Company (NYSE: RKT  ) . They apparently do good work, too. Last year, Rock-Tenn reported earning upwards of $750 million in profits on nearly $10 billion in sales of cardboard boxes, cardboard display cases, book covers, and related items and services. Unfortunately for Rock-Tenn, though, 2014 isn't starting out quite as well as 2013 did.

What's in the box?
Reporting its fiscal Q2 2013 earnings last night, Rock-Tenn advised that:

  • Q2 sales grew a bare 3% in comparison to Q2 2013, right in line with estimates.
  • Per-share profits, which were inflated by tax credits in last year's Q2, plummeted back to normalcy in Q2 2014. While up 13% year over year on an adjusted basis, Rock-Tenn's net was still only $1.13 per share -- 25% below analysts' forecast $1.51.
  • On the plus side, free cash flow for the quarter (cash from operations minus capital expenditures) came to $100.1 million -- a 37% increase over last year's Q2.

Added to its cash haul from Q1, year to date, Rock-Tenn has generated $304 million in positive free cash flow. While less brisk than the pace set in Q2 alone, that's still 17% better than the$259 million the company generated in the first half of fiscal 2013. If it maintains this pace, Rock-Tenn could be on track for better than $600 million in cash profits this year, and a price to free cash flow ratio of less than 12.

That's a pretty nice valuation on a stock growing its cash profits at 17%. For that matter, even if all Rock-Tenn manages going forward is the 14% long-term profits growth rate that Wall Street projects for it, 12 times free cash flow still looks like a more than fair price for the stock. Plus, it pays a dividend of 1.4%.

But can Rock-Tenn keep growing briskly?

What's behind the box
I think so. In fact, the simple fact that last quarter (for example), Internet e-tailer Amazon.com (NASDAQ: AMZN  ) grew its sales by 22%, while bricks-and-mortar retailer Sears Holdings shrank its sales 13%, tells me that the business of shipping goods bought over the Internet is continuing to boom. This trend drives demand for the cardboard boxes that Amazon and other Internet e-tailers' goods arrive in -- and signifies a long-term trend driving demand for more and more cardboard shipping boxes.

This suggests to me that Rock-Tenn is a sort of derivative play on the success of Amazon.com. And at a valuation of just 10 times earnings, versus 462 times earnings for Amazon, I'll come right out and say it: Rock-Tenn is a cheaper way to play this trend to ever-greater e-tailing than investing in Amazon. 

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