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Two analysts and top management from six sector firms examine the packaging & containers sector in this special 32-page Packaging & Containers issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info532.htm.

TWST: What has changed in the past two years?

Mr. Tiss: Well, I would say recession. Usually, these are early- and late-cycle stocks. So when economic uncertainty is right around the corner, or we’re in it — or it looks like it’s going to continue — these stocks tend to do a lot better than the overall market. It may be related psychologically, but in reality, these are pretty “steady Eddie,” 4% to 6% internal growth rate companies that can deliver anywhere from 6% EPS growth in a recession to 15% plus in a more robust economy. What caused them to underperform was the same thing. Who wants a 10%, 12% or 15% earnings growth company, when you can buy Cisco and JDSU that are going to grow 50% a year every year for the rest of our lives? Packaging is just not competitive in that scenario. But people have changed their expectations and have said, “Hey, you know what, 10% to 12% earnings growth is not so bad,” and all of a sudden these stocks are back.

TWST: What would those names be?

Mr. Tiss: In order, those names are Pactiv (NYSE:PTV), Ball (NYSE:BLL), Owens-Illinois NYSE:OI) and Sealed Air (NYSE:SEE). They’re picks, but all for different reasons.

TWST: Next was Ball Corp.

Mr. Tiss: Ball Corp. is almost completely the opposite in terms of internal growth potential. It is trading for about the same valuation — about 7.4 times EBITDA. What has happened at Ball is similar in that there has been a massive revival in profitability and free cash flow generation in the last five years. In 1996, Ball’s operating margins were 3%. This year they should be north of 10%. Again, 10% is an okay margin, but this company should be doing 12% to 14%. I think they have enough focus and intensity to be able to get there in the next couple of years. The companies start to differ with Pactiv’s internal growth rate being 4% to 6%, conservatively, whereas Ball’s is probably about 1% or 2%. Ball makes beverage cans. They are the largest North American manufacturer of beverage cans. They also make food cans, and have some smaller businesses. They make PET, the plastic water bottles, and they also have an aerospace division. What’s been driving the valuation of Ball is twofold. One is that they have raised product-selling prices in beverage cans. Making 36 billion cans with only 60 million shares outstanding — there is a lot of leverage. Even a very small price increase can have a huge impact on EPS. So earnings in 2001 were about $1.75. In 2002, the earnings have a good shot at $2.50 to $2.75. So there will be a huge improvement in earnings in 2002 over 2001. Then, in 2003, we can get north of $3 or to the $3.25 plus range in earnings, just from a continuation of price increases. So that’s the first thing. We have tremendous earnings leverage and we have a big spike coming up in earnings in front of us. The second thing is that in 1997 and 1998, Ball was generating very little free cash flow. In 2001, Ball generated about $4 per share in free cash flow. For 2002, they should be at least north of $3 per share in free cash flow generation. The company has been very smart about reallocating that free cash flow — paying down debt and buying back shares pretty aggressively.

This special issue includes:

1) Outlook for Packaging Companies - In an in-depth (2,400 words) Analyst Interview, Scott Davis, Vice President at Morgan Stanley, examines the outlook for the sector including and shares specific stock recommendations.

2) Packaging Stocks - In an in-depth (4,000 words) Analyst Interview, Joel Tiss, Senior Vice President at Lehman Brothers, Inc., examines the outlook for the sector including and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of six sector firms examine the outlook for their firm and the sector.