This Week in Paper by Joe Masters (MF Master) Charleston, SC (May 2, 1997) -- The bulls are back in town! An absolutely amazing week it was. Spurred on by evidence of minimal inflationary tendencies, a potential budget deal, good earnings reports and what was likely some massive short covering, the Dow surged by 4.93% with the S&P 500 swelling by an incredible 6.22%. Both indices are now extremely close to their all-time record high closing levels which were achieved slightly less than two months ago. Our Paper/Forest index wasn't too far behind, gaining 3.63% on the week. Leading the charge we JR), rising 7.39%, CONSOLIDATED PAPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDP)") else Response.Write("(NYSE: CDP)") end if %>, jumping 6.55%, and WESTVACO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: W)") else Response.Write("(NYSE: W)") end if %>, gaining 6.48%. Companies with a high exposure to containerboard fared the worst this week. Among them were JEFFERSON SMURFIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JJSC)") else Response.Write("(Nasdaq: JJSC)") end if %>, declining 0.94%, STONE CONTAINER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STO)") else Response.Write("(NYSE: STO)") end if %>, unchanged, and BOISE CASCADE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCC)") else Response.Write("(NYSE: BCC)") end if %>, up a mere 0.38%. All the News that Fits the Print: On Monday, Suomen Optioporssi, a Finnish options exchange, put the value of northern bleached softwood pulp at $519.18 per ton, up from $517.42 last week. (Editor's Note: This is the first time NBSK futures have risen since January.) And Monday per the CPPA, Canadian chemical paper grade market pulp shipments were extremely strong in March 1997, ending the month with the second highest monthly delivery figure on record, almost matching the high level of June 1996. Canadian suppliers shipped 800,000 tons in March, an increase of 30% or 186,000 tons compared to the same month one year earlier. In the first quarter of 1997, shipments were up by 25%, with outstanding growth in all world markets. Strong gains were registered in Asia/Africa (up 169,000 tons or 84%), USA (up 102,000 tons or 17%), Western Europe (up 98,000 tons or 21%), and Japan (up 60,000 tons or 27%). Production was 741,000 tons in March, and mill stocks declined by 59,000 tons to end the month at 903,000. At current shipping rates, it is estimated that Canadian producers held 37 days of supply at the end of March, 5 days lower than one month earlier, and the first significant decline since June 1996. Also Monday, TENNECO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TEN)") else Response.Write("(NYSE: TEN)") end if %> announced that it has completed the acquisition of the protective and flexible packaging division of NV Koninklijke KNP BT for $375 million. The business will be part of Tenneco Packaging. The acquisition consists of a protective packaging business with operations in Europe and North America and a European flexible packaging business. The combined operations accounted for $542 million in sales for 1996. On Tuesday, Brown Brothers Harriman & Co. analyst Kathryn McAuley upgraded her short-term rating on BOWATER INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOW)") else Response.Write("(NYSE: BOW)") end if %> to "buy" from "hold". The analyst downgraded five paper companies with exposure to container board to "short-term hold" from "buy" because of pricing pressure. The companies she downgraded are INTERNATIONAL PAPER CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %>, TEMPLE-INLAND INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TIN)") else Response.Write("(NYSE: TIN)") end if %>, UNION CAMP CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UCC)") else Response.Write("(NYSE: UCC)") end if %>, WEYERHAEUSER CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WY)") else Response.Write("(NYSE: WY)") end if %> and WILLAMETTE INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLL)") else Response.Write("(NYSE: WLL)") end if %>. And Tuesday, OFFICEMAX, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMX)") else Response.Write("(NYSE: OMX)") end if %> reported sales for the first quarter reached a record high $888.6 million, up from $730.6 million for the same quarter of 1996. Same-store sales for the quarter rose 5% on top of the 15% registered a year before. This gain was achieved despite an approximate 30% drop in retail paper prices and significant declines in the average retail prices for computers, faxes and copiers. Also Tuesday, Tenneco reported earnings per share from continuing operations rose 29% in the first quarter, to $0.44 per share from $0.34 a year-ago. Revenues increased 5.8% to $1.629 billion. Results reflect the newly-restructured organization which includes the automotive and packaging divisions and following the divestitures of their shipbuilding and utility businesses. On Wednesday, GAYLORD CONTAINER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GCR)") else Response.Write("(AMEX: GCR)") end if %> reported a net loss of $18.5 million ($0.35 per share) for the second quarter of fiscal 1997, compared to a net income of $1.2 million ($0.02 per share) in the second quarter of fiscal 1996. Net sales declined 12.3% to $192.4 million in the second quarter of fiscal 1997 compared to $219.3 million in the year-earlier period. Also Wednesday, ING Barings said it has maintained its "buy" rating but lowered its 1997 and 1998 earnings estimates for ARACRUZ CELULOSE SA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARA)") else Response.Write("(NYSE: ARA)") end if %>. 1997 estimates were lowered to $1.20 per ADR from $1.45 per ADR. Estimates for 1998 were lowered to $2.91 per ADR from $3.29 per ADR. A December 1997 price target of $23 per ADR was announced. And Wednesday, BADGER PAPER MILLS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BPMI)") else Response.Write("(Nasdaq: BPMI)") end if %> reported a first-quarter net loss of $861 million ($0.44 per share), compared to a loss of $662 million ($0.34 per share) for the same quarter of 1996. Sales declined 12.1% to $16.2 million. Also Wednesday, rumors made the rounds that beleagered MACMILLAN-BLOEDEL (MB.TO) is looking for a merger partner. Though several names have surfaced, the one most frequently mentioned is BOWATER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOW)") else Response.Write("(NYSE: BOW)") end if %> since it is known they have been seeking an acquisition and have a fair amount of cash and timberland available for this purpose. (Editor's Note: This is merely a rumor. Buying on rumor can prove to be highly risky.) On Thursday, JAMES RIVER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JR)") else Response.Write("(NYSE: JR)") end if %> said it expects to report a second-quarter gain of about $35 million from the completed $111 million cash sale of its 95,000-acre tract of timberlands in Alabama and Mississippi to Hancock Timber Resource Group. On Friday, Brown Brothers Harriman & Co. analyst Kathryn McAuley initiated coverage of JAMES RIVER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JR)") else Response.Write("(NYSE: JR)") end if %> with a short-term "hold" rating and a long-term "outperform" rating. Stone Container <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STO)") else Response.Write("(NYSE:STO)") end if %> and GAYLORD CONTAINER <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GCR)") else Response.Write("(AMEX: GCR)") end if %> have both recently announced price increases for containerboard grades effective in June. Whether or not the hike will be successful, of course, depends largely upon inventory levels. As of March, total U.S. containerboard inventories at box plants and mills stood at approximately 3.01 million tons, or about 5.1 weeks worth of supply. This, unfortunately, is still above the average monthly inventory level based upon the past 12 months. "Model Portfolio" Update: New all-time highs for Fort Howard stock (both intraday at $38.38/share and closing at $36.50/share), along with nice gains in our other "holdings", propelled our port-faux-lio to new heights this week. Purchase: IP = $40.50, FORT = $27.69, CDP = $49.13, CSAR = $29.00 Last Trade: IP = $43.00, FORT = $36.50, CDP = $54.88, CSAR = $26.50 This Week: Year-to-Date: Model = + 7.28 % Model = + 20.27 % SP500 = + 6.22 % SP500 = + 9.75 % FSPFX = + 3.48 % FSPFX = - 2.48 % Commentary: I mentioned last week that there are many other fine companies which are intimately related to the paper and building product manufacturing segment of the industry upon which I generally report. To start, I would like to give a brief overview of the distribution area and a few of the companies contained therein. Distributors are, of course, "middlepersons" between manufacturers and (eventually) the ultimate consumer. The industry is highly fragmented at this time. Though I haven't actually counted, I would dare say there are as many (if not more) distributors and distribution centers in the United States as there are manufacturing companies and production facilities. The competetiveness resulting from this over-abundance can be evidenced by examining the profit margins of these companies, which tend to be miniscule. However, the industry is undergoing a very rapid consolidation which could lead to improving conditions in the future. The performance of distribution companies tends to be directly tied to paper prices and price cycles. As the cost of paper rises, distributors recoup by charging their customers more. As paper prices fall, distributors will discount. In general, margins remain fairly consistent through these cycles. One difference, though, is that the performance of these companies typically lag that of manufacturers since they are usually locked into contracts with their customers which delay the implementation of these price changes. Many of the larger manufacturers have their own divisions which distribute and sell their products (though I'm aware of several that are considering spin offs), and many distinct distribution companies are not publicly traded. However, here are a few that are: The largest distributor of paper in North America is UNISOURCE WORLDWIDE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UWW)") else Response.Write("(NYSE: UWW)") end if %>. The company was recently formed from the division of Alco Standard into two separate organizations (the other is now known as IKON Office Solutions). Unisource holds an approximate 17% share of the United States market and about half of the Canadian market in the segment of their business which distributes to printers and publishers. The company also distributes products to food processors and grocery stores, where they have about a 6% market share in the United States and about 8% in Canada. Unisource continues to expand at a rapid pace and is currently concentrating on the Mexican marketplace. While net revenues have grown by around 13% annually as a result of both internal growth and acquisitions, their margins have been fairly stagnant over the past five years. In 1996, the company had sales of approximately $7 billion and income of $110 million (before non-recurring charges). Several weeks ago, Unisource announced they expected earnings in 1997 to decline by 30-35% compared to 1996, barring a significant increase in paper prices. For more information, visit their website at http://www.unisourcelink.com. Though not as heavily concentrated in paper, U.S. OFFICE PRODUCTS COMPANY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OFIS)") else Response.Write("(Nasdaq: OFIS)") end if %> is one of the world's largest and fastest-growing office suppliers and does sell a fair amount of paper products to corporate, commercial and industrial customers. In 1996, the company had sales of around $700 million with income of about $9 million. Another office products company that distributes a great deal of paper is BOISE CASCADE OFFICE PRODUCTS CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOP)") else Response.Write("(NYSE: BOP)") end if %>. A spin off from Boise Cascade Corporation, which still owns about 83% of the organization, the company is also in the process of performing acquisitions to grow the business. In 1996, revenues approached $2 billion with income in the area of $55 million. For more information, visit their website at http://www.bcop.com. As mentioned before, mergers are numerous and further consolidation seems to be a given in this sector. This could only improve the outlook for these companies as the potential for margin expansion increases with decreasing competition. Please note, as always, that reference to the forementioned companies should not be construed as a recommendation to buy or sell securities, but rather as information for possible further research. Coming soon......."suppliers". Until then.... Keep them presses rolling !!! TMF Master

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