This Week in Paper
by Joe Masters (MF Master)

Charleston, SC (April 25, 1997) -- Yet another round of earnings this week. Yes, they were generally miserable compared to the same quarter of 1996, but mostly this was expected. Thus, our Paper/Forest index was reasonably unaffected this week -- losing a mere 0.05% (compared to a gain of 0.53% for the Dow and a loss of 0.13% for the S&P 500. Not helping in the least was an encompassing upgrade of the sector by Morgan Stanley on Thursday as reported below. Of our 20 stocks, we had eight gainers and 12 losers. Topping the winner's column were FORT HOWARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORT)") else Response.Write("(Nasdaq: FORT)") end if %>, up 7.41%; BOISE-CASCADE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCC)") else Response.Write("(NYSE: BCC)") end if %>, up 5.65%; TEMPLE-INLAND <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TIN)") else Response.Write("(NYSE: TIN)") end if %>, rising 2.58%; and WEYERHAEUSER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WY)") else Response.Write("(NYSE: WY)") end if %>, gaining 1.40%. Losers included CONSOLIDATED PAPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDP)") else Response.Write("(NYSE: CDP)") end if %>, down 3.51%; GAYLORD CONTAINER <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GCR)") else Response.Write("(AMEX: GCR)") end if %>, declining 3.18%; and JEFFERSON SMURFIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JJSC)") else Response.Write("(Nasdaq: JJSC)") end if %>, dropping 2.75%.

All the News that Fits the Print:

On Monday, Suomen Optioporssi, a Finnish options exchange, put the value of northern bleached softwood pulp at $517.42 per ton, down from $517.71 last week.

Also Monday, AMERICAN PAD & PAPER COMPANY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGP)") else Response.Write("(NYSE: AGP)") end if %> reported net income for the first quarter (excluding non-recurring charges) improved to $4.7 million, or $0.16 per share, compared to pro forma net income of $4.5 million, or $0.15 per share, in the first quarter of 1996. Net sales for the quarter were $149.8 million compared to pro forma net sales of $148.4 for the first quarter of last year.

And Monday, ABITIBI-PRICE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABY, A.TO)") else Response.Write("(NYSE: ABY, A.TO)") end if %> reported a loss for the first quarter of 1997 of $26 million or $0.29 per share (Canadian), down from the record quarterly earnings of $72 million or $0.78 per share in the first quarter of 1996. Net sales declined to $571 million (Canadian) from $709 million in the first quarter of last year.

In addition on Monday, CHESAPEAKE CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSK)") else Response.Write("(NYSE: CSK)") end if %> announced a first quarter net loss of $3.5 million, or $0.15 a share, down from first quarter 1996's net income of $7.9 million, or $0.33 a share. First quarter net sales of $294.5 million were up 6% from first quarter 1996 net sales of $277.7 million.

And Monday, FORT HOWARD CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORT)") else Response.Write("(Nasdaq: FORT)") end if %> reported net income per share of $0.67 before an extraordinary item for the first quarter ending March 31, 1997, an increase of 56% compared to $0.43 in the same period of 1996. Net sales increased 3.9% to $400,759,000 compared to first quarter 1996 net sales of $385,747,000.

Also Monday, ST. LAURENT PAPERBOARD INC. (SPI.TO) reported net sales of $106.8 million (Canadian) and a net loss of $11.1 million, or $0.83 per share. For the corresponding period in 1996, the company reported net sales of $95.7 million and net earnings of $2.0 million, or $0.15 per common share.

More on Monday: MACMILLAN-BLOEDEL (MB.TO) reported a first quarter loss of $18 million (Canadian), or $0.16 per share (after a non-recurring gain associated with the sale of one of their subsidiaries), compared to a gain of $64 million, or $0.48 per share, for the same quarter of 1996. Sales increased 9.2% to $1.276 billion.

Finally Monday, CARAUSTAR INDUSTRIES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSAR)") else Response.Write("(Nasdaq: CSAR)") end if %> announced revenues for the first quarter were a record $157.6 million, an increase of 9% over revenues of $144.5 million for the same quarter of 1996. Net income was $11.7 million, a decrease of 13.4 percent from first quarter 1996 net income of $13.6 million. Earnings per share for the first quarter of 1997 were $0.47 per share, compared with the first quarter 1996 record of $0.53 per share.

On Tuesday, AVENOR, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANR, AVR.TO)") else Response.Write("(NYSE: ANR, AVR.TO)") end if %> reported of plans to increase pulp prices effective May 1.

Also Tuesday, Avenor reported a net loss, excluding non-recurring charges, of $40.8 million (Canadian), or $0.62 per share on net sales of $444.9 million. This compares with net earnings of $40.3 million, or $0.60 per share ($0.56 fully diluted) for the corresponding period last year on net sales of $577.4 million.

And Tuesday, SCOTT PAPER LTD. (SPL.TO) reported earnings of $6.07 million (Canadian), or $0.40 per share, compared with $6.73 million, or $0.44 per share, for the same quarter of 1996. Net revenues declined 14.9% to $105 million.

Also Tuesday, DONOHUE, INC. (DHC/B.TO) announced net sales for the first quarter were $407 million (Canadian), up 20% from net sales of $340.2 million in the first quarter of 1996. The company posted net earnings of $22.6 million, or $0.25 per share, compared with $53.2 million or $0.65 per share for the same quarter of 1996.

In addition on Tuesday, LOUSIANA-PACIFIC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LPX)") else Response.Write("(NYSE: LPX)") end if %> said it will permanently close its mill in Jasper, Texas.

Finally Tuesday, PERKINS PAPERS LTD. (PKN.TO) announced net earnings of $6.0 million (Canadian), or $0.15 per share, compared with $8.6 million, or $0.22 per share, for the corresponding period in 1996. Revenues increased slightly from $55.2 million in the first quarter of 1996 to $56.9 million for the same period in 1997.

On Wednesday, ABITIBI-PRICE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABY, A.TO)") else Response.Write("(NYSE: ABY, A.TO)") end if %> and STONE-CONSOLIDATED CORP. (T.SO) said they expect to incur a one-time charge resulting from their pending merger of about C$115 million, after an income tax benefit of C$60 million, accrued primarily in the second quarter of 1997. The formation of the new company, Abitibi-Consolidated Inc., should result in annual cost savings of about C$100 million ($70 from ST&A, $15 from purchasing, $10 from transportation and $5 from productivity). Additional cost savings are expected to result from a review of each mill and machine to assess opportunities for rationalization and optimization of grade mix, capacity and capital expenditures. In addition, due to refinancing of existing credit arrangements, annual interest savings should amount to approximately C$20 million initially. Shareholders of each company will vote on the all-stock deal at special meetings on May 29.

And Wednesday, TIMES MIRROR CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TMC)") else Response.Write("(NYSE: TMC)") end if %> reported net income jumped to $45.2 million, or $0.36 a share, from $26 million, or $0.14 a share, the year before. The numbers are indicative of strong top-line growth evident at many publishers as advertising revenue rose and newsprint prices fell in the quarter compared with the year earlier. Times Mirror said ad revenue rose 8.5% while newsprint were down 30% year-over-year. Total revenue fell 4%, to $773.9 million, as higher revenue at the newspaper publishing unit was offset by declines in the professional information and magazine divisions.

Also Wednesday, BUCKEYE CELLULOSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKI)") else Response.Write("(NYSE: BKI)") end if %> reported third quarter earnings of $14.0 million, or $0.74 per share, compared with $15.5 million, or $0.72 per share (before extraordinary loss), achieved in the same quarter of 1996. Revenues increased 23.2% to $139.5 million.

Finally Wednesday, Interstate/Johnson Lane said it upgraded CARAUSTAR INDUSTRIES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSAR)") else Response.Write("(Nasdaq: CSAR)") end if %> to "buy" from "neutral," citing improving business conditions and the stock's attractive valuation.

On Thursday, SCHWEITZER-MAUDUIT INTERNATIONAL, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWM)") else Response.Write("(NYSE: SWM)") end if %> reported first quarter net income was $11.3 million, or $0.70 per share, compared with net income of $9.4 million, or $0.59 per share, in the first quarter of 1996. Net sales were $113.0 million for the quarter compared with $119.8 million in the same period a year ago, a decline of 6%. In a separate announcement, the company's board authorized the buyback of up to $20 million of common shares until Dec. 31, 1998.

And Thursday, DOMTAR, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DTC, ME.TO)") else Response.Write("(NYSE: DTC, ME.TO)") end if %> announced a net loss of $12 million (Canadian), or $0.09 per share, for the first quarter, compared to net earnings of $21 million, or $0.14 per share, for the corresponding period in 1996. Net sales for the first quarter were $447 million, compared to $499 million in the corresponding period of 1996.

Also Thursday, JAMES RIVER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JR)") else Response.Write("(NYSE: JR)") end if %> reported earnings of $0.38 per share for the first quarter, compared to earnings of $0.23 per share, before non-recurring items, in the first quarter of 1996. et income was $47.5 million in the current quarter compared with $34.8 million, before non-recurring items, in the prior year. Sales for the current quarter were $1.4 billion, compared with $1.6 billion in the first quarter of 1996. Excluding sales of divested operations, first quarter 1996 sales would have been $1.4 billion.

In addition on Thursday,Caraustar Industries and Paccess, a Koplik partnership, announced today that they have formed an equally owned joint venture to engage in the manufacture and sale of paperboard tubes and cores in the Northwestern United States and Western Canada. The new company will be named Star Paper Tube Northwest and will be located at Paccess' existing converting facility in Tacoma, Washington.

And Thursday, ARACRUZ CELULOSE S.A. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARA)") else Response.Write("(NYSE: ARA)") end if %> reported first quarter earnings of $11.6 million, or $0.10 per ADS, compared with $26.3 million, or $0.24 per ADS in the first quarter of last year. Sales volume declined 20.4% to $110.5 million.

More on Thursday: SPRUCE FALLS ACQUISITION CORP. (SFAC.TO) announced second quarter net earnings of $12.1 million (Canadian), or $0.36 per share, compared to net earnings of $24.3 million, or $0.70 per share, in the second quarter of 1996. Net sales slipped to $61.7 million compared to sales of $86.3 million for the comparable quarter of the previous year.

And Thursday, FIBERMARK, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FMK)") else Response.Write("(NYSE: FMK)") end if %>, formerly Specialty Paperboard <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPBI)") else Response.Write("(Nasdaq: SPBI)") end if %>, reported first quarter earnings of $2.7 million, or $0.68 per share, compared with $1.0, or $0.26 per share, for the same quarter last year. Net sales increased by 139% (!!!) to $59.4 million. In addition, Fibermark declared a 3-for-2 stock split, effective May 13th. The split will increase outstanding shares to about 6.1 million from about 4.0 million.

Last, but not least, on Thursday, Morgan Stanley & Co. analyst Matt Berler upgraded INTERNATIONAL PAPER CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %>, WEYERHAEUSER CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WY)") else Response.Write("(NYSE: WY)") end if %>, GEORGIA-PACIFIC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GP)") else Response.Write("(NYSE: GP)") end if %>, TEMPLE-INLAND INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TIN)") else Response.Write("(NYSE: TIN)") end if %>, BOISE CASCADE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCC)") else Response.Write("(NYSE: BCC)") end if %> and UNION CAMP CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UCC)") else Response.Write("(NYSE: UCC)") end if %> to "outperform" from "neutral". Citing increased order levels and improving backlogs, Mr. Berler feels the price erosion is over and stronger earnings could occur in the second quarter. While not expecting a major cyclical rebound like occurred in 1994, the risk seems to outweight the potential reward should a global reacceleration of economic activity lead to an upcycle.

Morgan Stanley also upgraded ASIA PULP & PAPER CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAP)") else Response.Write("(NYSE: PAP)") end if %> from outperform to strong buy. (Editor's Note: On February 24, Mr. Berler also had upgraded Consolidated Paper, MEAD CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEA)") else Response.Write("(NYSE: MEA)") end if %> and CHAMPION INT'L <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHA)") else Response.Write("(NYSE: CHA)") end if %>. Most of these upgraded companies, from today's and February's reports, had been downgraded to "neutral" from "outperform" as recently as November 4. And prior to this, the same analyst issued upgrades in the middle of June, 1996 -- making for a change from positive to negative to positive again within the past ten months. Just for your information -- take it as you wish.)

On Friday, STONE-CONSOLIDATED (SO.TO) reported a net loss of $26 million (Canadian), or $0.24 per share, compared with a gain of $79 million, or $0.76 per share, for the same quarter of 1996. Sales declined 26.4% to $496 million.

And Friday, STONE CONTAINER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STO)") else Response.Write("(NYSE: STO)") end if %> reported a net loss of $96.7 million, or $0.99 per share, compared with a profit of $32.4 million, or $0.31 per share in the first quarter of 1996. Sales declined by 10.6% to $1.181 billion. In a separate report, Stone announced it would cut pulp and paper production by a minimum of 350,000 tons on top of the 97,000 tons already taken in the first quarter.

Also Friday, BT OFFICE PRODUCTS INTERNATIONAL, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTF)") else Response.Write("(NYSE: BTF)") end if %> reported net income for the first quarter of $4.4 million, or $0.13 per share, compared with $4.1 million, or $0.12 per share, in the previous year. Net sales for the quarter rose 17.2 percent to $401.6 million.

In addition on Friday, CROWN VANTAGE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CVAN)") else Response.Write("(Nasdaq: CVAN)") end if %> reported a net loss for the first quarter of $9.6 million, or $1.10 per share, compared to net income of $3.1 million, or $0.36 per share, in the first quarter of 1996. Net sales were $228.6 million compared to $252.9 million in the year ago quarter.

And Friday, TEMBEC (TBC.A) announced a loss for the first quarter of $15.8 million (Canadian), or $0.33 per share, compared with a $3.9 million loss, or $0.08 per share for the same quarter of 1996. Sales were up 49.4% to $334.4 million.

Finally Friday, the CPPA reported that Canadian newsprint producers increased their sales by 12.5 % in March compared to a year ago. Stocks held at Canadian newsprint mills closed the month at 477,000 tons, down 14,000 tons from the previous month. Consumption by all U.S users jumped by 8.9% over the previous year, amounting to 967,000 tons. Inventories in the hands of U.S. consumers represented 40 days of supply at the end of March, which is considered to be an average inventory level.

"Model Portfolio" Update:

Our other two "holding", Fort Howard and Caraustar, reported quarterly results on Monday as noted above (International Paper and Consolidated Paper reported back on the 8th). I took the opportunity to attend Fort Howard's conference call on Tuesday and I continue to remain impressed by this organization. Though tissue prices have declined slightly, the company was more than able to offset this through higher sales volume and improved efficiencies (the company trashed estimates of $0.58/share by 15.5%). Fort Howard projects this trend to continue, stating that there should be no problem exceeding the high-end of current analysts' estimates ($2.60 per share) for the full year. Even at $2.60, this would give Fort Howard a forward P/E of slightly over 12 based upon today's closing price.

Caraustar reported record revenues for the quarter, but a fair decline in earnings compared with 1996 (missing estimates of $0.49/share by 4.1%). The weakness in the first half of 1997, however, was projected by the company in their fourth-quarter report. I would imagine this information has already been reasonably reflected in their share price, and I believe 1997 will still be a great year for Caraustar.

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

Last Trade: IP = $41.63, FORT = $32.63, CDP = $51.50, CSAR = $24.81

This Week: Year-to-Date:

Model = + 1.47 % Model = + 12.11 %

SP500 = - 0.13 % SP500 = + 3.33 %

FSPFX = + 0.25 % FSPFX = - 5.76 %

Commentary:

Well, it appears that almost all Paper/Forest companies are now saying that "we've reached the bottom of the cycle." Situations do appear to be improving, with inventories experiencing small declines in many paper grades. Prices also seem to have risen a bit in response. Most notably, average transaction prices for newsprint have edged up from $535 to $555 per ton in the past month, and uncoated offset is up almost 15% to around $745 per ton. Coated publication grades also have made some inroads by gaining between 1 and 5% in the past month. In addition, more price increases have been announced for pulp, uncoated free-sheet, coated papers and newsprint.

This has been, and continues to be, a very interesting cycle. While the U.S. economy has been steaming ahead, the paper industry has lagged significantly due to overcapacity, almost appearing as if we were in an overall financial recession. Now as it seems we are on the verge of a recovery, the Federal Reserve appears increasingly likely to again raise interest rates in attempt to slow the heated economy from which it feels as though we did not fully benefit. Even if this occurrance were to have an insignificant material effect upon the industry, psychological factors surrounding the issue will probably keep stock prices within check.

Speaking of stocks, one easily forgotten aspect of investing (at least in my mind) is to look beyond the basic sector to related, "sister" industries for hidden opportunities. While I primarily have been concentrating on the papermaking industry, as it is my forte, there are a number of other affiliates which are worth considering. For instance, there are many fine companies involved in the sales and distribution of paper products. Though their fortunes (or misfortunes) are directly tied to the paper cycle, this industry is growing at a much faster pace due to heightened levels of mergers and acquisitions. Also interesting are suppliers to the Paper/Forest sector as they experience less periodicity since their products are in demand providing mills are operating, regardless of the selling price of paper and building products. For a contrarian approach, try the publishing industry. When paper companies are in the red due to depressed prices, firms in this sector are raking it in. Over the next few weeks I will focus on some of the various firms involved in these related segments, so please stay tuned.

Until then.....

Keep them presses rolling !!!

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