This Week in Paper
by Joe Masters (MF Master)

Charleston, SC (Mar. 28, 1997) -- "Markets Shake in Greenspan's Wake" seems to be a fitting title. After the Federal Reserve raised interest rates by a quarter point, from 5.25% to 5.50%, continued signs of a strong economy lead many to believe the Fed will not stop at just one hike. The result was a 0.94% loss for the Dow and a 1.30% decline for the S&P 500.

With fears that rising interest rates would impact the housing market, and given the potential for a stagnant economy which would hinder the recovery of paper prices, our Paper/Forest index dropped by 2.21%. In fact, only two of our 20 index companies finished in positive territory this week: P.H. GLATFELTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GLT)") else Response.Write("(AMEX: GLT)") end if %>, up 3.03%, and WILLAMETTE INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLL)") else Response.Write("(NYSE: WLL)") end if %>, up 0.60%. Leading the losers were GAYLORD CONTAINER <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GCR)") else Response.Write("(AMEX: GCR)") end if %>, down 9.16%, JAMES RIVER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JR)") else Response.Write("(NYSE: JR)") end if %>, off 6.72%, WEYERHAEUSER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WY)") else Response.Write("(NYSE: WY)") end if %>, declining 5.19%, and BOISE-CASCADE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCC)") else Response.Write("(NYSE: BCC)") end if %>, down 4.25%. It's interesting that James River fell so much because, being mainly a consumer products company (80% of capacity is devoted to the tissue, towel and disposable plate/cup segments), it is fairly insulated from changes in economic conditions.

All the News that Fits the Print:

On Monday, DOMTAR INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DTC)") else Response.Write("(NYSE: DTC)") end if %> confirmed that it had proposed a ''friendly, strategic combination'' of Domtar, AVENOR, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANR)") else Response.Write("(NYSE: ANR)") end if %> and REPAP ENTERPRISES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RPAPF)") else Response.Write("(Nasdaq: RPAPF)") end if %>. Domtar proposed that the three companies enter into a merger agreement prior to the vote on the proposed Avenor/Repap merger transaction. Avenor's management, after reviewing the matter with the Avenor board, advised Domtar that it wouldn't pursue this proposal. The Domtar/Avenor/Repap merger would have created one of the leading global competitors in the paper and forest products industry, with combined 1996 revenues of C$5.2 billion and assets of C$7.8 billion.

On Wednesday, Avenor shareholders rejected Avenor's proposed takeover of Repap by a margin of 74.4% to 25.6% of the 50.4 million votes cast. (Avenor has a total of 67 million shares outstanding.) Repap shareholders voted 92% in favor of the proposed acquisition by Avenor. Shareholders representing about 69.9 million of Repap's total outstanding shares took part in the vote. Stephen Larson, Repap's president, said after the meeting that Repap's board would immediately consider alternatives and announce decisions within two weeks.

And on Monday, TENNECO INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TEN)") else Response.Write("(NYSE: TEN)") end if %> said it has agreed to purchase the protective and flexible packaging division of the Dutch distribution, paper and packaging firm NV Koninklijke KNP BT for about $375 million. The purchase includes a protective packaging business in Europe and North America, and a European flexible packaging business. The business, which would more than double Tenneco's sales in Europe, accounted for $542 million in revenues during 1996.

Also Monday, ARACRUZ CELULOSE SA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARA)") else Response.Write("(NYSE: ARA)") end if %> and Gutchess International Group formed a joint venture company, called Tecflor Industrial SA, which will produce wood products. Aracruz, which will have a 60% stake in the venture, said it will contribute its plantation base and forest technology to Tecflor. Gutchess, with the remaining 40% interest, will contribute production and distribution channels.

A sad note on Monday: Ketchikan Pulp Co., Alaska's last pulp mill, was shut down by corporate parent LOUISIANA PACIFIC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LPX)") else Response.Write("(NYSE: LPX)") end if %>, partly because it needed up to $200 million in environmental renovations. The mill, in operation since 1954, served as the major employer in the small town of Ketchikan. Alaska Pulp Corp. shut down its pulp mill in nearby Sitka about four years ago.

On Tuesday, Merrill Lynch's Sherman Chao lowered his investment ratings for paper and timber stocks, citing pricing pressures market pulp, linerboard and uncoated freesheet as producer inventories continue rising while price discounts are widening.

Chao cut:

Weyerhaueser Co. to near-term neutral from accumulate, but retained the company's long-term accumulate rating.

GEORGIA-PACIFIC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GP)") else Response.Write("(NYSE:GP)") end if %> to near-term accumulate from near-term buy, but kept the long-term rating a buy.

Willamette Industries Inc. to accumulate from near-term buy, but the company remains a long-term buy.

Boise Cascade Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCC)") else Response.Write("(NYSE: BCC)") end if %> to near-term neutral from near-term accumulate, but retained his rating on the company as a long-term accumulate.

CHAMPION INTERNATIONAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CHA)") else Response.Write("(NYSE:CHA)") end if %> to near-term neutral from near-term accumulate, but kept Champion at a long-term accumulate.

UNION CAMP CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:UCC)") else Response.Write("(NYSE:UCC)") end if %> to near-term neutral from near-term accumulate, but kept the company's long-term accumulate rating.

STONE CONTAINER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STO)") else Response.Write("(NYSE:STO)") end if %> to neutral from near-term accumulate and also cut its long-term rating to accumulate from buy.

On Wednesday, Stone Container said it will defer payment of a preferred stock dividend in May because of a shortfall in its dividend pool.

Also on Wednesday, KIMBERLY-CLARK CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %> commemorated the company's founding of 125 years ago.

On Thursday, Georgia-Pacific Corp. said that $200 million in savings realized so far from a three-year cost-cutting effort would begin to show up on its bottom line sometime after the first quarter. The company completed the forced-layoff segment of the initiative after trimming 600 people from its payroll. However, total job cuts were expected to reach 2,500 by the end of the program, compared with 1,600 currently, as Georgia-Pacific pressed ahead with more early retirement offers and eliminated more jobs through attrition. Georgia-Pacific implemented the three-year cost-reduction plan last May, saying it intended to realize total savings of $400 million. Savings reached the $200 million half-way mark around the end of last year.

Also Thursday, analysts speculated that softwood lumber prices may stay at their current high levels or even start to climb once Canadian lumber companies are given a fresh quota to sell to the United States on April 1. Softwood lumber was trading at about US$370 a thousand board feet (tbf), against about US$320 before the quota system began a year ago. April 1 marks the start of the second year of the Canada-U.S. agreement to limit Canada's softwood lumber exports. The quota system limits fee-free exports from the four top exporting provinces to 14.7 billion board feet of lumber/year. Companies surpassing their quotas must pay a fee ranging from US$50 to US$100 per 1,000 board feet.

In addition on Thursday, MERCER INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MERCS)") else Response.Write("(Nasdaq: MERCS)") end if %> announced quarterly and full year earnings. For the fourth quarter of 1996, net income from continuing operations was $3.7 million, or $0.25 per share, on revenues of $41.0 million. This compares with 1995 fourth quarter net income from continuing operations of $20.1 million, or $1.48 per share, on $68.5 million in revenues. For the year ended December 31, 1996, net income from continuing operations was $15.6 million, or $1.12 per share, on revenues of $186.7 million. Net income from continuing operations for 1995 was $65.6 million, or $5.14 per share on revenues of $300.7 million.

And on Thursday, ALLIANCE FOREST PRODUCTS INC. (ALP.TO) closed its acquisition of Kimberly-Clark's Coosa Pines facilities in Alabama, for US$602.7 million. The facilities include a paper mill with a production capacity of 308,000 tons of newsprint and 85,200 tons of groundwood printing paper, as well as a pulp mill with a production capacity of 220,000 tons of fluff pulp and 50,000 tons of Southern Bleached Hardwood Kraft pulp (SBHK). The facilities also include 167,000 hectares of owned and leased timberland and a sawmill with a production capacity of 51 million fbm.

"Model Portfolio" Update:

Thanks to a rebound in the share price of CARAUSTAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSAR)") else Response.Write("(Nasdaq: CSAR)") end if %>, our faux folio actually managed to gain in an otherwise depressing week for the market. After reaching a low of nearly $22 a share, maybe some others perceived this issue to be a bargain as much as I did. Everything else this week was pretty close to a "wash".

Purchase: IP = $40.50, FORT = $27.69, CDP = $49.13, CSAR = $29.00

Last Trade: IP = $41.00, FORT = $32.00, CDP = $51.88, CSAR = $25.13

This Week: Year-to-Date:

Model = + 2.43 %    Model = + 11.74 %
SP500 = - 1.30 %    SP500 = + 4.47 %
FSPFX = - 1.04 %    FSPFX = - 2.34 %

Commentary:

With the first quarter of this year expected to be a real "bummer" (showing my age with that descriptor) for earnings in the paper industry, we look beyond to signs of hope for an upturn sometime later this year. Unfortunately, just as situations seemed to be improving, along comes the Federal Reserve with its attempt to slow the economy. Bad timing for an industry already struggling in the grips of conditions which resemble those of the past recession. While striving not to make any unFoolish predictions, I think it only reasonable and logical to now expect a protracted recovery for this sector, remembering that economic vigor is the main impetus for the increased demand needed to revitalize this industry. By examining the "First Call" area here on AOL (keyword: company), a declining trend of analysts' projections for both 1997 and 1998 is evident. While one should look toward the longer term when investing, it seems the term might be a little longer for this sector than originally hoped. Patience, though, usually has its rewards.

Keep them presses rolling !!!

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