This Week in Paper by Joe Masters (MF Master) Charleston, SC (Feb. 7, 1997) -- Lots of volatility this week, but the markets generally ended about where they started. Actually, I suppose the 0.63% gain for the Dow and the 0.43% rise in the S&P500 this week should not be considered as insignificant as I just implied. If we had that every week, the Dow would experience an annual gain of around 38%. That 0.43% jump in the S&P500, if it happened every week, would translate into an approximate 24% return over a year's time. I guess it just seems insignificant in relation to the weekly gains made in January. Everything is relative, isn't it? Looking at the Paper/Forest sector this week, we saw a positive move (for a change) of 1.01% this week, aided by Solomon's upgrade (see below). Of our 20 "index" stocks, we had 11 advances, 7 declines and 2 unchanged. The winner's column was lead by Consolidated Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CDP, up 3.67%)") else Response.Write("(NYSE:CDP, up 3.67%)") end if %>, Georgia-Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GP, rising 3.40%)") else Response.Write("(NYSE:GP, rising 3.40%)") end if %> and Union Camp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:UCC, tacking on 3.17%)") else Response.Write("(NYSE:UCC, tacking on 3.17%)") end if %>. Loser's included: Fort Howard <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:FORT, down 4.72%)") else Response.Write("(Nasdaq:FORT, down 4.72%)") end if %>, Stone Container <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STO, off 1.87%)") else Response.Write("(NYSE:STO, off 1.87%)") end if %> and Westvaco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:W, declining 1.28%)") else Response.Write("(NYSE:W, declining 1.28%)") end if %>. All the News that's Fit to Print: On Monday, Suomen Optioporssi, a Finnish options exchange, put the value of northern bleached softwood pulp at $553.90 per ton, down from $555.86 last week. In January, the PIX mean was $556.86, down from $559.05 in December. Also Monday, Crown Vantage <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:CVAN)") else Response.Write("(Nasdaq:CVAN)") end if %> reported a net loss for the 52-week year ended Dec. 29, 1996 of $24.8 million, or $2.87 per share, compared to net income of $45.3 million for the 53-week year in 1995. Net sales in 1996 of $925.4 million on volume of 947,625 tons compared to net sales of $1.1 billion on 985,061 tons in 1995. The company reported a net loss for the fourth quarter of 1996 of $15.3 million, or $1.77 per share, compared to net income of $9.9 million, or $1.17 per share, in the fourth quarter of 1995. And on Monday, Smith Barney Inc. analyst George Adler upgraded P.H. Glatfelter Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:GLT)") else Response.Write("(AMEX:GLT)") end if %> to buy from neutral. The analyst, however, cut his 1997 earnings estimate to $1.38 a share from $1.55. The upgrade was based on valuation. The firm set a 12-month price target at $22 per share. On Tuesday, Caraustar Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:CSAR)") else Response.Write("(Nasdaq:CSAR)") end if %> announced that revenues for the fourth quarter ended December 31, 1996, were a record $169.6 million, an increase of 16.8 percent over revenues of $136.6 million for the same quarter of 1996. Net income was a fourth quarter record $14.3 million, an increase of 7.8 percent over fourth quarter 1995 net income of $13.2 million. Earnings per share for the fourth quarter of 1996 were also a fourth quarter record of $0.56 per share, an increase of 9.8 percent over $0.51 per share in the fourth quarter of 1995. For the year ended December 31, 1996, revenues rose 10.7 percent to a record $602.7 million, compared with $544.6 million last year. Net income for the year increased 34.7 percent to a record $57.9 million, or $2.28 per share, compared with $43.0 million, or $1.66 per share, for the year 1995. Also Tuesday, Salomon Brothers said its global paper and forest products equity research team is recommending that investors overweight stocks in the industry, primarily based upon the fact that the stocks are ''cheap'' relative to the market according to Chip Dillon, the firm's New York-based analyst for the sector. A second factor behind the Salomon Brothers recommendation is the firm's conclusion that capacity increases in the industry will be below long-term averages in 1998 and 1999. Salomon estimates that global paper and paperboard capacity grew by about 4% in 1996 and will grow by 4.2% this year. The firm had anticipated further growth of 3.8% for 1998, but with many projects cancelled, postponed or revised, Salomon now believes capacity growth will be 2.5% to 3% in 1998 and less than 2.5% in 1999, compared with a long-run average of 3.4%, Chip Dillon said. While not anticipating any moves in the very short-term, the firm expects prices for containerboard to turn up late this year, with other pulp and paper products following in 1998. Dillon said the firm is suggesting that investors shift to an overweighted position ''with the expectation that by the middle of 1997 stocks should start to outperform as better earnings in 1998 are gradually discounted.'' The following 11 companies were upgraded: Aracruz Celulose S.A. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ARA)") else Response.Write("(NYSE:ARA)") end if %>, to buy from hold; Boise Cascade Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BCC)") else Response.Write("(NYSE:BCC)") end if %>, to buy from hold; Buckeye Cellulose Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BKI)") else Response.Write("(NYSE:BKI)") end if %>, to strong buy from buy; Consolidated Papers Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CDP)") else Response.Write("(NYSE:CDP)") end if %>, to buy from hold; International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:IP)") else Response.Write("(NYSE:IP)") end if %>, to buy from hold; Jefferson Smurfit Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:JJSC)") else Response.Write("(Nasdaq:JJSC)") end if %>, to strong buy from buy; Mead Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MEA)") else Response.Write("(NYSE:MEA)") end if %>, to strong buy from buy; Temple-Inland Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TIN)") else Response.Write("(NYSE:TIN)") end if %>, to buy from hold; Union Camp Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:UCC)") else Response.Write("(NYSE:UCC)") end if %>, to buy from hold; Georgia-Pacific Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GP)") else Response.Write("(NYSE:GP)") end if %>, to buy from hold; Weyerhaeuser Co. (WY), to buy from hold. Finally Tuesday, Fort Howard Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:FORT)") else Response.Write("(Nasdaq:FORT)") end if %> reported its eighth consecutive year-over-year quarterly increase in operating income. Net income per share before unusual and extraordinary items reached $0.52 for the fourth quarter ending December 31, 1996, an increase of nearly 58% compared to net income per share of $0.33 in the same period of 1995. Excluding an environmental charge, Fort Howard's operating income rose 13.5% in the fourth quarter of 1996 compared to the fourth quarter of 1995; operating income margin rose to 31.3% in the fourth quarter of 1996 compared to 25.5% in the fourth quarter of 1995. For the fourth quarter, Fort Howard's consolidated net sales fell to $384.4 million, compared with fourth quarter 1995 net sales of $415.3 million. Net income per share before unusual and extraordinary items was $2.07 for 1996 compared to $0.57 for 1995. Before the environmental charge, 1996 operating income rose 37.3% to $494,371,000 from $360,119,000 in 1995. Operating income margin for 1996 was 31.3% compared to 22.2% in 1995. For 1996, consolidated net sales were $1,580,771,000, a decline of 2.5% from 1995 net sales of $1,620,903,000. Fort Howard Corp said it expects its 1997 first-quarter results to match or exceed those of the fourth quarter. For the full year, the company told analysts it is comfortable with the street earnings consensus of $2.35 a share. On Wednesday, Dain Bosworth started coverage of Honeywell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HON)") else Response.Write("(NYSE:HON)") end if %> with a buy rating. In a research note, Dain Bosworth said changes in management and operating culture should ensure continuing margin improvements. The brokerage firm said Honeywell's merger with Measurex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MX)") else Response.Write("(NYSE:MX)") end if %> creates global leadership for process automation solutions in the pulp and paper industry. Dain Bosworth estimates 1997 net income of $3.65 a share, and its 12-month price target is $84 to $86 a share. On Thursday, the James River Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:JR)") else Response.Write("(NYSE:JR)") end if %> announced that it will increase its presence in the Russian market by opening a tissue converting plant outside of Moscow. The company has signed a long-term lease agreement for the site, and it is expected that the converting lines, which are being relocated from other European plants, will be operational in the fall of 1997. On Friday, Asia Pulp & Paper Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PAP)") else Response.Write("(NYSE:PAP)") end if %> said expansions at several plants have increased its production capacity. The company said it began operating an off-machine coater at its Mojokerto Mill which can coat 250,000 tons of paper a year, boosting its annual paper production to 1.15 million tons a year. The company said it began operating three packaging machines at the Serang Mill of its PT Indah Kiat Pulp & Paper unit, adding 280,000 tons of containerboard and 350,000 tons of boxboard capacity a year. The parent company's annual packaging capacity is now 1.2 million tons. Asia Pulp & Paper said it installed new pulp driers at its Inda Kiat Perawang Pulp Mill and Lontar Jambi Pulp Mill, boosting pulp capacity by 270,000 tons to 1.5 million tons a year. "Model Portfolio" Update: The week was not nearly as friendly as the last. Fort Howard reported nice earnings growth, but a slight decline in revenues. This was enough to send the stock significantly lower (but it recovered some later in the week). Margins appeared good, as did their commitment to the future. We're still holding some cash, from our sale of Measurex last week, and are still on the lookout for a "buying" opportunity. 12/31/96: IP = $40.50, FORT = $27.69, CDP = $49.13 Last Trade: IP = $42.00, FORT = $30.25, CDP = $49.38 This Week: Year-to-Date: Model = + 0.20 % Model = + 14.30 % SP500 = + 0.43 % SP500 = + 6.59 % FSPFX = - 0.09 % FSPFX = + 0.94 % Commentary: This week, Solomon Brothers recommended "overweighting" your portfolio in the Paper/Forest sector as reported above. Eleven, count 'em, eleven companies were upgraded on the basis that stock prices could start rising in mid-1997 in anticipation of a turnaround starting late this year (lead by containerboard). Let's go back to my report of January 17th (only 3 weeks ago). Their projection, probably several weeks old by the time I reported on it, was for paper prices to fall by 7 percent and board prices to fall by 3 percent in 1997 (compared to 1996). Company earnings for 1997, on the average, were projected to fall by 10 percent in paper and 8 percent in wood. Actually, they had the most pessimistic view of the 10 firms which reported their estimates. Does something seem amiss here? Solomon is saying the outlook for 1997 is lousy, but you should buy some stocks of paper companies. Though I think it is a bit premature to "overweight" (a similar point alluded to in Solomon's news release), their view is actually quite Foolish. They are expecting conditions to improve and are suggesting buying before that occurs (i.e, your basic "countercyclical" approach of buying when conditions look bleak), possibly having to hold for a year or more in order to gain respectable returns. While I disagree with some of their assessments (i.e., I believe pulp will lead containerboard and that not quite as many future projects will be cancelled or postponed), I do want to say that it is refreshing to see a firm expound upon their rationale rather than issuing the standard "upgraded to buy from hold, analyst unavailable for comments" statement which is so pervasive in the industry. Fool On, Solomon! Keep them presses rolling !!! MF Master MF Logman

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