This Week in Paper by Joe Masters (TMF Master) Charleston, SC (May 16, 1997) -- It was yet another banner week for stocks in the Paper/Forest sector. After zooming ahead a market-whomping 3.69% last week, our index was up another 2.42% this week (compared to gains of 0.35% for the Dow and 0.60% for the S&P500). Riding on the heels of statistics which suggest that recently-implemented price increases are holding, the sector has caught fire. In fact, in the past few weeks the sector has nearly caught up to the total yearly performance of the broader market -- not bad, after lagging behind so desperately for the majority of the year. Leading the winner's column this week were STONE CONTAINER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STO)") else Response.Write("(NYSE: STO)") end if %>, up 11.63%, GAYLORD CONTAINER <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GCR)") else Response.Write("(AMEX: GCR)") end if %>, up 9.19%, MEAD CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEA)") else Response.Write("(NYSE: MEA)") end if %>, up 7.14%, and GEORGIA-PACIFIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GP)") else Response.Write("(NYSE: GP)") end if %>, up 4.40%. The linerboard/medium producers were particularly strong this week after being beaten down so badly over the past two years. Out of 20 stocks, the only loser this week was KIMBERLY-CLARK (NSYE: KMB), which declined by 3.02%. All the News that Fits the Print: On Monday, Suomen Optioporssi, a Finnish options exchange, put the value of northern bleached softwood pulp at $542.66 per ton, up from $524.55 last week (a huge increase, and the highest level since early February). Also Monday, WAUSAU PAPER MILLS CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WSAU)") else Response.Write("(Nasdaq: WSAU)") end if %> announced that it completed its acquisition of Rexam PLC's Otis Specialty Papers unit for $58 million, which will increase Wausau's technical paper capacity by more than 40%. And Monday, Carter Holt Harvey announced net profit of NZ $251 million for the year ended March 31, compared with a NZ $453 million net profit in 1995. Net sales were down 4% to NZ $2.94 billion. On Tuesday, the Finnish Forestry Industries Federation reported that North American and Scandinavian (NorScan) market pulp inventories (excluding Sweden) fell by 180,000 tons in April to about 1.79 million tons. And Tuesday, OFFICEMAX, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMX)") else Response.Write("(NYSE: OMX)") end if %> reported record first quarter earnings of $15,730,000, or $0.13 per share, compared to $12,554,000, or $0.10 per share, for the comparable period last year. Sales for the first quarter increased 22% to $888,640,000 from $730,595,000 for the comparable period a year ago.The company said that this gain was achieved despite an approximate 30% drop in retail paper prices and significant declines in the average retail prices for computers and various electronic products versus last year which, collectively, negatively impacted OfficeMax's same-store sales in the quarter by approximately 4%. Also Tuesday, Stone Container Corp. said it will implement a $700 million funding program designed to address its near-term capital, financing and debt amortization needs. Stone Container said it is also considering various options regarding the sale or monetization of certain assets that, if completed, could result in a significant reduction of its indebtedness. (Editor's Note: I believe the high level of debt has been a major hinderance to the appreciation of Stone' stock.) And Tuesday, the State of Florida sued the nation's leading producers of toilet tissue, accusing them of fixing prices charged schools, hospitals and factories for sanitary paper. Attorney General Bob Butterworth said companies boosted wholesale prices to commercial users, which could not be justified by economic conditions. The price of wood pulp, the major component in paper manufacturing, has tumbled 18% since 1989 while the wholesale price of commercial sanitary paper has surged by 41%, he said. Ten paper manufacturers were named in the civil complaint: Kimberly-Clark, Scott Paper, Georgia-Pacific, Fort Howard, Bay West Paper, Cascades Industries, Encore Paper, James River, Marcal Paper Mills and Wisconsin Tissue Mills. The complaint seeks civil penalties of $1 million from each company for antitrust violations and also seeks $10,000 for each violation of unfair trade practice laws. On Wednesday, AMERICAN ISRAELI PAPER MILLS LTD. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: AIP)") else Response.Write("(AMEX: AIP)") end if %> reported financial results for the first quarter sales of NIS 295.2 million (US $87.8 million), compared with NIS 285.2 million ($84.9 million) for the last quarter of 1996, and NIS 302.3 million ($90 million) for the corresponding quarter last year. Net income for the first quarter of 1997 totaled NIS 12.6 million ($3.7 million), compared with NIS 10 million ($3 million) for the last quarter of 1996, and NIS 13.8 million ($4.1 million) for the corresponding quarter last year. On Wednesday, PaineWebber added JAMES RIVER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JR)") else Response.Write("(NYSE: JR)") end if %> to its "focus list," and First Boston removed CARAUSTAR INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSAR)") else Response.Write("(Nasdaq: CSAR)") end if %> from theirs. And Wednesday, FLETCHER CHALLENGE CANADA LTD. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLP)") else Response.Write("(NYSE: FLP)") end if %> commented on its continued focus to expand its paper business and did not rule out further talks with MACMILLAN BLOEDEL LTD. (MB.TO) over its paper division. Fletcher Canada (majority owned by New Zealand's Fletcher Challenge Ltd.) said it will receive C$348 million for its recent divestiture of it 53% ownership in TIMBERWEST (TFL.TO), with that company also refinancing C$240 million in debt owed to Fletcher. TimberWest shareholders on Wednesday approved the sale of the company to a group of institutional investors who are turning it into an income trust. On Thursday, Bear Stearns upgraded JEFFERSON SMURFIT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JJSC)") else Response.Write("(Nasdaq: JJSC)") end if %>, GAYLORD CONTAINER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GCR)") else Response.Write("(AMEX: GCR)") end if %>, GEORGIA-PACIFIC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GP)") else Response.Write("(NYSE: GP)") end if %> and UNION CAMP CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UCC)") else Response.Write("(NYSE: UCC)") end if %> to "attractive" from "neutral". And Thursday, MERCER INTERNATIONAL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MERCS)") else Response.Write("(Nasdaq: MERCS)") end if %> reported net income from continuing operations for the first quarter of 1997 was $3.2 million, or $0.21 per share, on revenues of $44.4 million. This compares with 1996 first quarter net income from continuing operations of $5.9 million, or $0.43 per share, on $49.9 million in revenues. Also Thursday, UPM-KYMMENE OY (UPM1V.HE) said its profits edged lower in the latest quarter and voiced a more cautious view about the full year than some of its rivals. Profit before special items and taxes fell 2% to 1.35 billion markka (US$264 million) from 1.37 billion a year earlier. Sales fell to 13.1 billion markka (US$2.6 billion) from 13.3 billion. In addition on Thursday, NORANDA FOREST, INC. (NF.TO) announced the completion of the sale of its Thorold, Ontario Paper Mill to the Gallaher Thorold Paper Co. And Thursday, HARNISCHFEGER INDUSTRIES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HPH)") else Response.Write("(NYSE: HPH)") end if %> filed a definitive solicitation statement with the SEC and said it expects to begin solicitation of written demands to require GIDDINGS & LEWIS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GIDL)") else Response.Write("(Nasdaq: GIDL)") end if %> to hold a special meeting of its shareholders for the purpose of voting to remove the G&L board of directors and to replace them with nominees of Harnischfeger. On Friday, IMPACT SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MPAC)") else Response.Write("(Nasdaq: MPAC)") end if %> reported fourth-quarter earnings (before an extraordinary charge) of $463,000, or $0.04 per share, on revenues of $4.95 million. This compares to earnings of $615,000, or $0.06 per share, on revenues of $5.63 million for the fourth quarter of 1996. For the full year, the company had earnings (before the charge) of $1.448 million, or $0.13 per share, on revenues of $19.76 million. This compares to full year 1996 earnings of $2.029 million, or $0.19 per share, on revenue of $17.77 million. Impact Systems develops, manufactures, sells and services computer-based actuator, measurement and control systems to reduce variations which occur in the manufacture of paper. Also Friday, ROCK-TENN CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RKT)") else Response.Write("(NYSE: RKT)") end if %> said it has signed a definitive agreement to acquire Rite Paper Products Inc., Wright City, Missouri, for cash and shares of Rock-Tenn's class A common stock. And Friday, LONGVIEW FIBER CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LFB)") else Response.Write("(NYSE: LFB)") end if %> announced second-quarter earnings of $4.63 million, or $0.09 per share, compared to $10.04 million, or $0.19 per share, for the same quarter of last year. Sales declined by 6.9% to $186 million between the comparable quarters. Also Friday, ING Barings reiterated its "buy" recommendation on Brazilian paper and pulp firm ARACRUZ CELULOSE SA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARA)") else Response.Write("(NYSE: ARA)") end if %> and raised its year-end price target to $26 from $23 per ADR. And finally on Friday, underwriters led by Nesbitt Burns Inc. agreed to purchase from ST. LAURENT PAPERBOARD INC. (SPI.TO) some C$455 million worth of common shares. Most of the proceeds will be used to fund a portion of the cost of assets recently purchased from CHESAPEAKE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSK)") else Response.Write("(NYSE: CSK)") end if %>. "Model Portfolio" Update: Following our "sale" of FORT HOWARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORT)") else Response.Write("(Nasdaq: FORT)") end if %> last week, the stock rose from our $42/share to hit a new, all-time high of $46/share on Thursday. Based upon this, I figured I goofed and realized we could have made even more money this week -- upon which I immediately jumped out my office window. Fortunately, I am located on the first floor. After I dusted myself off, I came to the more accurate conclusion that it is unrealistic to expect to pick the absolute top, or bottom, of a stock -- so don't sweat it. INTERNATIONAL PAPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> did well this week, rising 3.63% for the week and hitting a new, all-time high of $47.50/share on Wednesday. A definite laggard for most of this year, IP has now risen a market-beating 14.51% year-to-date based upon Friday's closing price. Since this week we sat on some cash from our sale of Fort Howard, we underperformed in relation to the sector (we were tromped by Fidelity Paper/Forest -- FSPFX -- arrrgh). Being fully-invested at all times usually has its rewards. This week would certainly have proven that true. We continue to search out a worthy candidate for our idle investment dollars. Purchase: IP = $40.50, CDP = $49.13, CSAR = $29.00 Last Trade: IP = $46.38, CDP = $54.50, CSAR = $27.50 This Week: Year-to-Date: Model = + 1.08 % Model = + 28.36 % SP500 = + 0.60 % SP500 = + 12.02 % FSPFX = + 2.59 % FSPFX = + 3.65 % Commentary: As investors, we sometimes lose sight of the bigger picture. We can't see the forest for the trees (sorry, I had to throw that one in). We tend to focus upon that which is immediately obvious and neglect that which is slightly more obscure. However, this inconspicuousness can provide certain advantages to those who are able and willing to delve beyond the surface. To what am I referring, you ask? I am referring to companies which are intimately related to those industries which seem to capture the headlines. Often it is the more prominent players in the more notable sectors which investors concentrate upon. Due to this, "market efficiency" effects make it more difficult for the individual investor to prosper. That is, by the time something is realized by the typical individual, the news is most often already reflected in the stock price. However, those things which are less obvious can provide areas where the individual can greatly benefit due to the inefficiencies which result from the lack of attention. Let's take an example. A house is being constructed. Something which may be obvious to most is the need for lumber with which to build it. Investors flock to buy shares of lumber-producing companies since they realize these companies will be beneficiaries from the construction. As a result, the stock prices soar. This is great, of course, if you had the foresight to know that a house was being built, or had some inside information. Many of us don't, though, which results in us missing out on some lucrative results. However, something maybe not so obvious to most is the need for nails to connect the lumber. Herein lies the opportunity for those who are willing to look at the bigger picture. Eventually, other investors will realize that these nail manufacturers are growing earnings at a healthy pace. The recognition of such information typically leads to higher stocks prices -- and nice results for those who saw the forest. Why am I writing about this, other than hoping to aid some novice investors and to refresh the memories of those more seasoned? Well, to point out that there are a number of industries related to Paper/Forest which tend to be overlooked and which can offer some nice opportunties. When prices of paper or lumber start rising, everyone rushes out to buy the Boises and the Weyerhaeusers (as we've seen in the past few weeks). But what about the nail producers -- the Honeywells and the Blounts? They are there, behind the scenes. A couple weeks ago, I touched upon the area of paper distribution and contract stationers. This group, of which there are few publicly-traded companies, tend to be cyclical like the paper manufacturers. Their earnings will wax and wane with the price of paper, just like the producers (although because of contracts the cycle will lag slightly behind). This week, I would like to offer a quick peek at another related area -- the suppliers to the Paper/Forest sector. As with paper and wood products manufacturers, suppliers come in all shapes and forms. There are hundreds of companies which provide products and services to the industry, from machinery to equipment to chemicals to maintenance and so on. One common misconception regarding suppliers is that their earnings are as cyclical as the manufacturing companies to which they sell or service. In reality, the price of paper and building products, which greatly influences the profitability of producers and distributors, has minimal effect upon that of suppliers. Why? Well, regardless of the level of paper and wood prices, manufacturers must still have the equipment and materials needed to fabricate the goods. Providing mills are operational (i.e., they have not curtailed production to keep inventories manageable), the growth of supplier companies is more related to producer capacity growth. One problem which should be considered, though, is that profit margins for many suppliers have been squeezed as manufacturers have become much more cost-conscious in recent years and have pressured companies into providing discounts. Thus, one should focus more upon those companies which have increased efficiencies and made other improvements to offset this dilemma. Some representative firms in the supplier group include: HARNISCHFEGER INDUSTRIES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HPH)") else Response.Write("(NYSE: HPH)") end if %> which is involved in the manufacture of pulp and papermaking equipment (80% owner of the Beloit Corporation), along with machinery used in the mining and material handling industries. BLOUNT INTERNATIONAL, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLT.A, BLT.B)") else Response.Write("(NYSE: BLT.A, BLT.B)") end if %> which, among other items, produces forest havesting equipment. THERMO FIBERTEK, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TFT)") else Response.Write("(AMEX: TFT)") end if %>, a leading manufacturer of equipment used in papermaking and paper recycling, including deinking systems, stock-prep equipment and water-management systems and services. Note that TFT is a subsidiary of the THERMO ELECTRON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TMO)") else Response.Write("(NYSE: TMO)") end if %>. BETZDEARBORN, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTL)") else Response.Write("(NYSE: BTL)") end if %>, HERCULES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HPC)") else Response.Write("(NYSE: HPC)") end if %>, ENGELHARDCORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EC)") else Response.Write("(NYSE: EC)") end if %> and AKZO NOBEL NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:AKZOY)") else Response.Write("(Nasdaq:AKZOY)") end if %> which are manufacturers of specialty chemicals used in the production of paper. ALBANY INTERNATIONAL, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIN)") else Response.Write("(NYSE: AIN)") end if %>, the world's leading producer of engineering fabrics used in the manufacture of paper. HONEYWELL, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HON)") else Response.Write("(NYSE: HON)") end if %> which makes and distributes controls and sensors used in the Paper/Forest industry. Note that Honeywell recently acquired MEASUREX CORP. (former NYSE: MX). Please note, as always, that reference to the aforementioned companies should not be construed as a recommendation to buy or sell securities, but rather as information for possible further research. Keep them presses rolling !!! TMF Master

© Copyright 1995-2000, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. The Motley Fool is a registered trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us