Sector Snap: Paper product makers set for rally?

Citi Investment Research analyst Chip Dillon said the recent runup in energy prices has savaged shares of AbitibiBowater Inc., Smurfit-Stone Container Corp. and International Paper Co., all of which are his top picks in the sector.

On Thursday, natural gas futures for August delivery fell as much as 8.2 percent on the New York Mercantile Exchange, the most since a 13.8 percent drop recorded on Aug. 20, 2007, according to Nathan Golz, researcher at Wachovia Securities in St. Louis. Prices settled 86.1 cents lower at $10.537 per 1,000 cubic feet.

Natural gas is both a fuel and a component for packaging makers.

"If the recent move lower for oil and natural gas is the start of a major reversal, paper companies, which are energy-intensive, would be major beneficiaries," Dillon wrote in an analyst note.

Lehman Brothers analyst Peter Ruschmeier cited lower natural gas prices as partial grounds for near-term optimism on containerboard makers Temple-Inland Inc., International Paper Co. and Smurfit-Stone Container Corp.

Dillon also said paper and packaging companies should benefit from continued U.S. dollar weakness, especially against the euro, which was buying about $1.58 in morning trading.

"Perhaps the world takes seriously the U.S. government's decision to keep money cheap to bolster the financial system. If a weak dollar continues to be the fallout of this decision, it will be another huge boost to our top picks as their pricing power will be enhanced on the global stage."

Ruschmeier said the weak dollar "is resulting in an improvement of the relative cash cost structure of U.S. producers vs. Canada, Europe, Asia, and even Latin America."

Earlier this week, Deutsche Bank-North America analyst Mark Wilde said the sector could see shuttered capacity in the third quarter and aggressive pricing that will partially offset higher costs.