Clearwater Paper Corp: More capacity shuts required, unclear when next move is; Neutral

Research evidence excerpt

Clearwater Paper Corp: More capacity shuts required, unclear when next move is; Neutral

Launching coverage on CLW at Neutral

Top SBS producer; Better S/D needed for catalysts

We launch coverage with a Neutral rating and $19 PO on Clearwater Paper (CLW). In the

last few years, CLW has undergone a transformation into a pure-play solid bleached

sulfate (SBS) paperboard supplier following its acquisition of Graphic Packaging’s

Augusta mill and the divestiture of its former tissue business to Sofidel. Like most

competitors in the boxboard market (and specifically in SBS), CLW is navigating a down-

cycle with excess industry capacity, import competition, and uneven end-market

demand.

The summary on our Neutral:

1. CLW’s capital allocation and tactics have allowed it to manage the downturn

2. Some industry capacity has already shut but more needs to come out

3. Pricing has stabilized but a recovery has yet to take hold. This will be difficult

4. We are somewhat below guidance and CLW could have trouble hitting targets

until the cycle turns

5. CLW’s strategic positioning as an unintegrated boxboard supplier with average

cost position will make it challenging to generate excess returns, long term.

We see upside and downside risks as balanced both as regards earnings and valuation.

A couple milemarkers we’re looking for

Wait for signs of market turn; Not quite there yet

We see risks as balanced. On the one hand, recent press commentary suggests pricing

has stabilized and capacity closures, including one from Clearwater, are encouraging.

CLW’s stock should coincidentally reflect an improvement in fundamentals as SBS prices

rise – Exhibits 9 and 10 illustrates this. However, markets remain out of balance – June