This Week in Paper by Joe Masters (MF Master) Charleston, SC (Jan 31, 1997) -- The state of the Paper/Forest group this week can be best summed up with one word: "ugly". I can think of a few more descriptives, but decorum and TOS prevent me from posting these herein. If you recall, last week saw the stock price of all 20 of our "index" companies decline. This week, the trend continued with 18 of 20 incurring a loss. Meanwhile, the market soared with the Dow rising 1.74% and the S&P500 gaining 2.03% this week. With our Paper/Forest index losing a whopping 2.85%, this week represented one of the largest divergences I can recall. Other than many reports of poor earnings, which were largely expected, there were no significant news items to account for the drop. The two companies which managed to avoid disappointing shareholders this week were Jefferson-Smurfit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:JJSC, up 2.46%)") else Response.Write("(Nasdaq:JJSC, up 2.46%)") end if %> and Fort Howard <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:FORT, up 1.20%)") else Response.Write("(Nasdaq:FORT, up 1.20%)") end if %>. Leading the losers were Stone Container <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STO, down 8.55%)") else Response.Write("(NYSE:STO, down 8.55%)") end if %>, Mead Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MEA, declining 7.22%)") else Response.Write("(NYSE:MEA, declining 7.22%)") end if %>, James River <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:JR, off 5.17%)") else Response.Write("(NYSE:JR, off 5.17%)") end if %> and Boise-Cascade <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BCC, down 4.83%)") else Response.Write("(NYSE:BCC, down 4.83%)") end if %>. For the full listing, please check the "Weekly Performance" folder in the scroll-box. News You Can Use: Starting off the week, Suomen Optioporssi, a Finnish options exchange, on Monday put the value of northern bleached softwood pulp at $555.86 per ton, up from $555.41 last week. On Monday, Repap Enterprises Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:RPAPF)") else Response.Write("(Nasdaq:RPAPF)") end if %> reported results for the year ended December 31, 1996. Before unusual items, the net loss attributable to common shareholders amounted to $190.5 million ($1.54 per share) compared with a net income of $162.9 million ($1.33 per share) in 1995. Repap's 1996 revenues of $1.7 billion were down 17 percent from the $2.1 billion realized in 1995, reflecting substantially lower pulp and coated paper prices. Before unusual items, the net loss attributable to common shareholders for the fourth quarter of 1996 amounted to $58.6 million, compared with net income of $37.7 million in 1995. Fourth quarter 1996 revenues totaled $425.0 million compared with $451.8 million in 1995. Also on Monday, Stone Container Corp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STO)") else Response.Write("(NYSE:STO)") end if %> said its board of directors decided to eliminate the company's common stock dividend, in light of losses for the company for the last three quarters. Also Monday, the Canadian Pulp and Paper Association reported that total capacity of Canada's pulp and paper industry is expected to increase by 1.1% in 1997, while shipments are expected to rise 3.7%. The industry's overall operating rate, therefore, should edge back up to 90% from 88% last year, estimated Kevin McElhatton, vice-president, economics and statistics for the industry group. 'On the basis of economic growth forecasts for the U.S., Europe and Asia, which point to higher consumption, combined with lower inventories, the market is much more robust as we enter 1997,'' Kevin McElhatton said. Shipments by the Canadian industry in 1996 totaled 28 million metric tons, down 1.8% from 1995. Newsprint shipments declined 4.7%. Shipments of printing and writing papers fell 3.6%. Canadian exports of chemical-grade market pulp slipped 0.7%. Shipments of paperboard, used in packaging, rose 6.5%, reflecting improved economic activity in some of the world's major markets, the association said. Economic growth in North American this year ''should match or surpass 1996, the economy of Western Europe should expand by 2.5%, and the developing economies of Latin America and Asia are expected to remain buoyant,'' McElhatton said in his prepared remarks. 'Japan is the only major economy likely to slow in 1997. This suggests very good growth in world paper and board consumption.'' During the 1996-1999 period, total industry capacity is expected to rise by 4.8%, to 33.1 million tons, according to the capacity survey. That translates into an annual growth rate of 1.6%, compared with a trend rate of 2.8% for the preceding 10 years, the association reported. In addition on Monday, Honeywell Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HON)") else Response.Write("(NYSE:HON)") end if %> announced they will buy Measurex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MX)") else Response.Write("(NYSE:MX)") end if %>, which will give the Minneapolis company a dominant presence in the computer-based control system business in the pulp and paper industry. Honeywell, said it would buy Measurex for $35 a share, or $600 million in cash. Honeywell said it would finance the purchase with a credit facility from Chase Manhattan Bank N.A and J.P. Morgan. Officials added, however, they may seek to refinance $400 million to $500 million of that in the public market at a later date. Honeywell on Friday will begin a tender offer for Measurex's shares. That offer will end in 20 business days, and the company expects the purchase to close in March. Also Monday, Stone Container Corp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STO)") else Response.Write("(NYSE:STO)") end if %> said it filed a shelf registration with the Securities and Exchange Commission to sell up to $1 billion in debt securities, preferred and common stock. Proceeds will be used for general corporate purposes, including working capital, the repayment or refinancing of indebtedness, future acquisitions and/or capital expenditures. More on Monday: P.H. Glatfelter Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:GLT)") else Response.Write("(AMEX:GLT)") end if %> announced quarterly earnings of $0.40 per share, compared with $0.39 per share for the fourth quarter of 1995. Revenues were essentially flat. For the year, Glatfelter earned $1.41 per share compared with $1.49 per share in 1995. Year-over-year sales declined 9.2%. Also Monday, Rayonier <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:RYN)") else Response.Write("(NYSE:RYN)") end if %> announced fourth quarter and full year 1996 earnings. Excluding previously announced non-recurring charges, fourth quarter earnings were $16.4 million, 55 cents per share, up from third quarter's $15.6 million, 52 cents per share, although lower than 1995 fourth quarter earnings of $34 million, or $1.13 per share. Sales for the period were $302 million, 6 percent higher than the third quarter but 8 percent below prior year. For the year, the company earned $79 million, $2.63 per share, excluding the special charges, compared to $142 million, $4.75 per share, earned in 1995. Prior year results included a gain of 80 cents per share from the sale of a small timberland parcel in New Zealand. Including the special charges for 1996, the company had a net loss of $98 million, or $3.28 per share. Sales for 1996 were $1.2 billion compared to $1.3 billion in 1995. Finally on Monday, Rayonier Forest Resources Company, the managing general partner of Rayonier Timberlands, L.P. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LOG)") else Response.Write("(NYSE:LOG)") end if %>, reported full year 1996 Partnership income of $99.5 million, or $5.43 per Class A Unit, $13.9 million, or 48 cents per Class A Unit, lower than 1995 results. Operating cash flow allocable to each Class A Unit was $5.69, or 48 cents per Class A Unit lower than last year. Sales for 1996 were $147.9 million, a decline of $12.4 million from the prior year. For the fourth quarter, Partnership income was $21.8 million, $1.22 per Class A Unit, but $12.7 million, or 53 cents per Class A Unit, lower than 1995. On Tuesday, The Procter & Gamble Company <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PG)") else Response.Write("(NYSE:PG)") end if %> announced net earnings per share for the October-December quarter of $1.35, a 14% increase over the same quarter of the prior year. Net earnings for the quarter were $944 million, a 13% increase over the same quarter last year. For the first six months of the fiscal year, worldwide net earnings per share were $2.74, a 12% increase versus a year ago. Net earnings were $1.92 billion, an 11% increase over the prior year. Worldwide unit volume for the first six months was up 2% over the prior year, while sales were stable, primarily reflecting unfavorable exchange rates. Also Tuesday, Kimberly-Clark Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:KMB)") else Response.Write("(NYSE:KMB)") end if %> announced the highest quarterly and annual earnings from operations in the company's 125-year history. Earnings, as reported, in the fourth quarter of 1996 were $347.1 million, or $1.23 per share, versus a loss of $841.7 million, or $3.01 per share in 1995. Excluding nonoperating items n both years, earnings from operations for the quarter were a record $1.27 per share in 1996, an increase of 39.6 percent from the prior year's 91 cents per share. The previous record was $1.24 per share from operations, established in the third quarter of 1996. For the year, reported earnings per share were $4.98 versus 12 cents in 1995. Excluding nonoperating items, earnings per share were a record $4.75 in 1996 compared with $3.86 in 1995, a gain of 23.1 percent. On Wednesday, Dean Witter Reynolds analyst Evadna Lynn upgraded Rayonier Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:RYN)") else Response.Write("(NYSE:RYN)") end if %> to "buy" from "accumulate." The analyst cut her 1997 earnings estimate to $2.85 a share from $3.50 ''to account for a six-month delay in the company's realizing improving pulp prices.'' The firm set a 12-month target of $45 for the NYSE-listed stock. Also Wednesday, Specialty Paperboard, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:SPBI)") else Response.Write("(Nasdaq:SPBI)") end if %> today announced record results for the fourth quarter and year ended December 31, 1996. Net earnings for the fourth quarter of 1996 were $2.5 million or $0.63 per share, a record high in Company quarterly earnings. Fourth quarter results represent a 21% increase over the previous earnings record established in the third quarter of 1996 and a 54% improvement over the comparable quarter in 1995, during which the Company earned $1.6 million or $0.41 per share. For the full year of 1996, the Company earned $7.5 million or $1.86 per share, a 19% increase over 1995 earnings of $6.3 million or $1.56 per share. Results for both years are adjusted to exclude non-recurring items. In addition on Wednesday, Sonoco Products Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SON)") else Response.Write("(NYSE:SON)") end if %> reported quarterly earnings of $0.42 per share, the same as in the fourth quarter of 1995, on 6.3% greater revenues. For the year, Sonoco earned $1.73 per share, compared with $1.64 in 1995. Year-over-year revenues increased by 3.0%. More on Wednesday: Abitibi-Price Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ABY)") else Response.Write("(NYSE:ABY)") end if %> announced net earnings of $104 million, or $1.14 per fully diluted common share, below the 1995 peak earnings of $272 million. In the fourth quarter of 1996, the company lost $9 million on sales of $625 million. This compares with earnings in the fourth quarter of 1995 of $90 million on sales of $740 million and with earnings in the third quarter of 1996 of $18 million on sales of $613 million. Also Wednesday, Gaylord Container <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:GCR)") else Response.Write("(AMEX:GCR)") end if %> reported a loss in their first quarter of fiscal year 1997 of $0.18 per share, compared to earnings of $0.35 per share (before extraordinary items) for the same quarter last year. Sales declined 22.9% between the comparable quarters. Finally on Wednesday, Fletcher Challenge Canada (FCCa.TO) announced a net loss of $7.9 million, or 6 cents per share, for the three month period. For the same quarter last year, the company had net earnings of $70.1 million, or 56 cents per share. For the six months ended December 31, 1996, Fletcher Challenge Canada recorded a net loss of $6.6 million, or five cents per share, including the provision for restructuring expenses which reduced net earnings by $15.2 million, or 12 cents per share. During the same period last year, the company had net earnings of $150.5 million, or $1.21 per share. On Thursday, ING Barings said it has reiterated its buy recommendation on Brazilian pulp producer Aracruz Celulose SA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ARA, ARC.SA)") else Response.Write("(NYSE:ARA, ARC.SA)") end if %>. The bank said it has set a new price target for Aracruz's level three American Depositary Receipt of $14, for an upside potential of 67 percent. Also Thursday, Schweitzer-Mauduit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SWM)") else Response.Write("(NYSE:SWM)") end if %> announced quarterly earnings of $0.56 per share, compared to $0.11 per share for the same quarter in 1995 (pro forma), on 2.5% lower sales. For the year, the Company earned $2.41 per share, compared to $1.81 in 1995 (pro forma), on 1.8% higher sales. In addition on Thursday, Mosinee Paper Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:MOSI)") else Response.Write("(Nasdaq:MOSI)") end if %> reported quarterly earnings of $0.72 per share, compared to $0.50 per share for the same quarter of 1995 (both before extraordinary charges). Sales declined by 1.9%. For the year, the Company earned $2.88 per share, compared with $1.49 per share in 1995 (again, both before extraordinary charges). Year-over-year sales increased by 2.9%. Also Thursday, Stone-Consolidated (SO.TSE) announced net income of $164.3 million, or $1.58 per common share for 1996, compared with $183.5 million, or $2.59 per share for 1995. Sales of $2.286 billion for the year surpassed the $1.728 billion reported in 1995, as the 1995 results included only two months of operations of the former Rainy River Forest Products Inc. (which was purchased from Boise-Cascade). Net income for the fourth quarter of 1996 was $5.1 million, or $0.05 per common share. For the comparable quarter of 1995, the Company reported net income of $60.5 million, or $0.70 per common share. The fourth quarter of 1995 included non-recurring expenses of pre-tax $40.6 million (after tax $26.4 million), or $0.25 per common share, relating to the acquisition of Rainy River Forest Products Inc. Sales for the fourth quarter of 1996 were $550.7 million, down from sales of $617.2 million recorded in the corresponding quarter of 1995. Earnings due next week (as per First Call): Wed - Stone Container <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STO)") else Response.Write("(NYSE:STO)") end if %>, estimate (0.56) loss Thur - Fort Howard <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:FORT)") else Response.Write("(Nasdaq:FORT)") end if %>, estimate 0.50 "Model Portfolio" Update: The equity gods smiled down upon our portfolio this week with the proposed acquisition of Measurex <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MX)") else Response.Write("(NYSE:MX)") end if %> by Honeywell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HON)") else Response.Write("(NYSE:HON)") end if %>. We "sold" our pseudo-holding in MX, following the news on Monday, at a price of $34.50 per share and are now evaluating opportunities for our next "purchase". 12/31/96: IP = $40.50, MX = $24.00, FORT = $27.69, CDP = $49.13 Last Trade: IP = $40.88, MX = $34.50, FORT = $31.75, CDP = $47.63 This Week: Year-to-Date: Model = + 9.28 % Model = + 14.07 % SP500 = + 2.03 % SP500 = + 6.13 % FSPFX = - 1.15 % FSPFX = + 1.03 % Commentary: As mentioned, there were no specific news items (e.g., major downgrades or negative outlooks) reported to explain the recent poor performance of the sector. True, sales and earnings were meager, but no more so than was generally expected. However, it is becoming more evident that the price increases which were attempted to be secured this month for various paper grades (specifically pulp and containerboard) were not effective due to persistent high inventory levels which have been plaguing the industry for some time now. In addition, there is speculation that the proposed increase in newsprint prices could also hit a snag. While I don't believe paper prices will fall significantly from here, we could see stagnation at these levels for quite some time. Without the specter of a "turn-around", via these price increases, to bolster the sector, it appears investors have become unwilling to hold. Also probably hurting the sector in the past few weeks are indications that exports are slowing from the levels attained in the second half of 1996. Remember that as the dollar strengthens, exports suffer (as do earnings of multinational organizations due to unfavorable currency exchange rates). Should this trend continue, and given that 71 of the 72 new paper machines expected to start operations in 1997 are located outside the U.S., the impact could be substantial to American producers who are heavily involved in the export market. Keep them presses rolling !!! MF Master MF Logman

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