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 (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 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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Rich Smith

As a defense writer for The Motley Fool, I focus on defense and aerospace stocks. My job? Every day of the week, I'm monitoring the news, figuring out the winners and losers, and tracking down the promising companies for you to invest in. Follow me on Twitter or Facebook for the most important developments in defense & aerospace, and other great stories.

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Related Tickers

12/31/1969 7:00 PM
RKT $0.00 Down +0.00 +0.00%
Rock-Tenn Company CAPS Rating: ****
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