Trying to pick up stocks in anticipation of cyclical recoveries is like trying to snatch a falling knife. Pull it off and you're treated to the "oohs" and "aahs" of your suitably impressed friends. Do it wrong, though, and you're treated to a wait in the ER, some stitches, and a tetanus booster.
Rock-Tenn (NYSE:RKT) gave investors one of those nasty cuts last week when fiscal first-quarter earnings came in well below expectations. Though sales were reported up more than 27%, that was due to an acquisition, and organic performance was actually down 3% -- and the company missed the average estimate. Natural gas prices torched the company's profitability, costing it about $0.18 a share in earnings. After a variety of adjustments, the net loss per share came to $0.13 -- considerably worse than the $0.10 that analysts generally expected.
Another spike in natural gas will make me live to regret this, but I think 2006 could still end up being a better year for Rock-Tenn. Now, the situation here is not identical to that for Packaging Corp. (NYSE:PKG) or Smurfit-Stone Container (NASDAQ:SSCC), but there are some basic similarities. Namely, finished goods prices seem to be on the rise, material costs (in this case, recycled fiber) seem to be lower, and energy costs have come off their highs.
A few other things about the quarter give me added confidence. First, despite the poor earnings performance, the company still produced positive free cash flow. Second, it secured a multi-year agreement with Procter & Gamble's (NYSE:PG) Gillette business. Last, the stock is trading below average historical valuations and investors don't seem convinced that things will get much better.
Clearly this is not the right kind of stock for everyone, but I'm intrigued about a rising price environment and a company with a very high-quality mill in Alabama. Don't mistake this for anything like a sure thing, but patient Fools may yet want to dig in and see if they find potential value here.
For more of the Foolish paper chase:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
