Seeking Alpha: Smart Deals And Smurfit Synergies Can Still Help Rock-Tenn

Rock-Tenn (RKT) is a fairly well-respected company in the paper packaging industry, but the company has struggled to generate appreciably better returns on capital over time. I suspect that is at least part of the reason that the company has lagged both International Paper (IP) and Packaging Corp (PKG) over the long term and other players like Graphic Packaging (GPK) and MeadWestvaco (MWV) more recently.

The company took on a big operational challenge (and a lot of debt) when it acquired Smurfit-Stone at a generous price in 2011, but the company has likely not maxxed out the potential synergies and operational improvements here. I do have some concerns about the near-term health of the corrugated and containerboard markets, but it looks as though the shares already factor in a fair bit of that risk.

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Smart Deals And Smurfit Synergies Can Still Help Rock-Tenn

Investopedia: MeadWestvaco's Sum Of The Parts Doesn't Seem To Add Up To Value

MeadWestvaco (NYSE:MWV) has always been a little more willing than average to realign its business towards better long-term returns for shareholders. To that end, the company has been willing to divest/sell businesses (including its consumer and office products business (which merged with ACCO Brands (NYSE:ACCO)) while acquiring packaging and chemicals businesses in faster-growing areas like Brazil and India. That said, while MeadWestvaco does indeed look like a well-run packaging and specialty chemicals company, it's difficult to generate a cash flow scenario that suggests these shares are dramatically undervalued.

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Investopedia: Deleveraging And Diversification Make Graphic Packaging Worth Watching

By and large, it's hard to get excited about owning paper and paper packaging stocks for the long term. A few strong operational stories such as Rock-Tenn (NYSE:RKT) and Packaging Corp (NYSE:PKG) have outperformed, but by and large this is an industry with very modest revenue growth and highly variable input costs. All of that said, I think investors should take a closer look at Graphic Packaging (NYSE:GPK). Not only has the company made good progress with operating efficiencies, it is also a long-term deleveraging and diversification story.

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Investopedia: Rock 'em Sock 'em Rock-Tenn

There's a saying out there (from Warren Buffett, I believe) that goes something like "whenever a great management team and a lousy industry come together, it's the industry that maintains its reputation." That warning would seem to apply to Rock-Tenn (NYSE:RKT) these days as although the company's stock has done reasonably well, management continues to struggle to deliver on the potential synergies and operational improvements at the former Smurfit-Stone assets.

The crux of the Rock-Tenn argument is pretty simple. If Rock-Tenn can do with Smurfit-Stone's corrugated packaging assets what it did previously with its own paperboard/containerboard assets, this will be a large and profitable company. If Rock-Tenn cannot lift up those Smurfit-Stone assets, then the company will languish from a value-destroying deal that levered the balance sheet and saddled it with lesser assets.

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