When last I wrote on small packaging company Rock-Tenn (NYSE:RKT), I liked what the company was trying to achieve with its Gulf States acquisition. But I wondered whether this was really a safe value pick when both the company's pricing and costs are very hard for management to control. It would seem that some of that came home to roost in the fourth quarter as soft demand and higher costs led to an OK, though uninspiring, quarter.

Revenue as reported rose 26%, but all of that growth and then some came from the contributions of Gulf States. Stripping out the contributions of this acquisition, revenue would appear to have fallen about 6% from last year. But it wasn't just soft demand and pricing that hurt. The company also faced higher energy, chemical, and freight costs, which led income from continuing operations to shrink about 22% from last year.

More positively, cash flow generation for the fiscal year looked strong. Operating cash flow improved by more than 50%, and free cash flow more than tripled. Of course, some of this was boosted by the acquisition, and changes in working capital were also a significant contributing factor. Still, while the company plans to increase its level of cap-ex spending next year, I'm guardedly optimistic that the company can continue to grow free cash flow at a decent rate and pay off its debt.

The biggest issue here in my mind is simply the dynamics of the business. Large customers can push on pricing, and the company has relatively little leverage with the cost of chemicals or energy. Couple that with large competitors like Georgia Pacific (NYSE:GP) and Smurfit-Stone (NASDAQ:SSCC), and those thin margins don't offer up much of a buffer when times get tough.

Speaking of Georgia Pacific, though, its decision, recently announced, to sell itself does raise an interesting overall point about the sector. There are more than a few paper and packaging companies that look appealing on a cash flow basis, and Rock-Tenn is among them. With a lot of private equity money floating out there, there could be more transactions to come in this sector. While it's unwise to buy a stock on the hopes of a buyout, Rock-Tenn's cash flow picture suggests that it's not exactly between a rock and a hard place just yet.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).