This Week in Paper by Joe Masters (TMF Master) Charleston, SC (May 23, 1997) -- Paper/Forest stocks continue to exhibit momentum as it becomes clearer that the recovery for paper prices has started. With a gain of 4.76% for our index, the second best week in the two years I've been keeping track, we managed to slam the broader market (the Dow rose 2.10% and the S&P500 gained 2.08%). Leading the winner's column this week were JEFFERSON SMURFIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JJSC)") else Response.Write("(Nasdaq: JJSC)") end if %>, up 11.20%, KIMBERLY-CLARK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %>, rising 7.66%, WEYERHAEUSER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WY)") else Response.Write("(NYSE: WY)") end if %>, gaining 6.60%, GAYLORD CONTAINER <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GCR)") else Response.Write("(AMEX: GCR)") end if %>, up 6.53%, and BOWATER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOW)") else Response.Write("(NYSE: BOW)") end if %>, tacking on 6.32%. Of our 20 index stocks, only STONE CONTAINER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STO)") else Response.Write("(NYSE: STO)") end if %> showed no advancement in share price this week (it closed unchanged). All the News that Fits the Print: On Monday, Suomen Optioporssi, a Finnish options exchange, put the value of northern bleached softwood pulp at $548.75 per ton, up from $542.66 last week. In April, the PIX mean was $518.12, down from $522.28 in March and from $546.59 in February and $556.86 in January. Also Monday, TEMPLE-INLAND INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TIN)") else Response.Write("(NYSE: TIN)") end if %> announced that it has received approval to acquire California Financial Holding Company, the parent company of Stockton Savings Bank, F.S.B., and to merge Stockton Savings Bank with its wholly-owned subsidiary, Guaranty Federal Bank. The transaction is expected to close on or about June 27, 1997. And Monday, Alex. Brown & Sons Inc. lowered AMERICAN PAD & PAPER CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGP)") else Response.Write("(NYSE: AGP)") end if %> to "buy" from "strong buy". Also Monday, POTLATCH CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PCH)") else Response.Write("(NYSE:PCH)") end if %> announced that its Board of Directors has approved a plan to relocate the company's corporate headquarters from San Francisco to Spokane, Washington. Anticipated to be completed in the third quarter, the relocation will aid in lowering administrative costs. On Tuesday, Merrill Lynch & Co. initiated coverage of FLETCHER CHALLENGE PAPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLP)") else Response.Write("(NYSE: FLP)") end if %> with a near-term rating of accumulate and a long-term rating of buy. Announced Tuesday, BUCKEYE CELLULOSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKI)") else Response.Write("(NYSE: BKI)") end if %> will be added to the S&P SmallCap 600 Index in the Basic Materials economic sector effective after the close of trading on May 27. And Tuesday, HARNISCHFEGER INDUSTRIES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HPH)") else Response.Write("(NYSE: HPH)") end if %> reported record orders, sales and operating income for the second quarter ended April 30, 1997. Net sales increased 7% to $794.6 million in the second quarter, up from $739.5 million in the same quarter last year. Net income increased 34% to $45.0 million ($0.94 per share) from $33.6 million ($0.71 per share) in the second quarter of 1996. Second-quarter orders of $850.9 million improved 27% from levels of a year ago. Net sales in the first six months of fiscal 1997 of $1,494.0 million improved 9% and orders of $1,691.7 million were up 30% over the same period last year. Net income of $75.8 million ($1.59 per share) improved from $56.7 million ($1.21 per share) in the comparable period last year. Beloit Corporation (80% owned by Harnischfeger) posted sales of $332.1 million in the second quarter compared to $302.0 million in the same period last year, a 10% gain. The improvement reflected continued strong original equipment sales in the Pacific Rim and aftermarket sales in the United States. Operating profit was $29.5 million, up 26% compared to $23.3 million in the same quarter last year. Second-quarter bookings were up 55% compared to 1996. On Wednesday, WEYERHAEUSER COMPANY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WY)") else Response.Write("(NYSE: WY)") end if %> announced it has reached an agreement to sell the assets of Saskatoon Chemicals, Ltd., a subsidiary of Weyerhaeuser Canada, to a subsidiary of STERLING CHEMICALS HOLDINGS, INC. (OTC: STXX). Weyerhaeuser said it expects the sale to have a favorable, material impact on its financial results in the quarter in which the sale closes. Weyerhaeuser said that it was selling the chemical operation as part of its continuing effort to tighten focus on its core businesses. On Thursday, STONE-CONSOLIDATED CORPORATION (SO.TO) announced that two of its newsprint mills located at Shawinigan (Quebec) and Kenora (Ontario) will take downtime due to market conditions. Shawinigan will be shut down from June 21 to July 7, representing a loss of 14,000 tons. Kenora will be down from June 15 to June 22, representing a loss of 12,500 tons. And Thursday, THERMO FIBERTEK INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:TFT)") else Response.Write("(AMEX:TFT)") end if %> completed its acquisition of Black Clawson Co.'s paper stock-preparation business for about $108 million in cash. Also Thursday, the Canadian Pulp and Paper Association (CPPA) reported that Canadian production of market pulp was up 8% in April from a year earlier. Shipments by Canadian pulp mills rose 11% from a year earlier. Producers' inventories were lower at the equivalent of 30 days' supply at the end of April compared with 37 days' supply in March. Canadian mills produced 665,000 metric tons of market pulp in April, up from 613,000 tons a year earlier. The mills operated at 86% of capacity for the latest month, compared with 80% a year earlier. Total shipments for April rose to 793,000 tons from 717,000 tons a year earlier, with the increase coming mainly from within Canada and from the U.S. Shipments to Japan declined by 30% in April from a year earlier. Canadian producer stocks fell to 775,000 tons at the end of April from 903,000 tons in March. In addition on Thursday, U.S. OFFICE PRODUCTS CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OFIS)") else Response.Write("(Nasdaq: OFIS)") end if %> said it plans to acquire MAIL BOXES ETC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAIL)") else Response.Write("(Nasdaq: MAIL)") end if %> in a stock swap valued at $267 million. Under the transaction, U.S. Office will exchange its shares one-for-one for the 11.3 million shares outstanding of San Diego-based Mail Boxes. On Friday, a spokesperson for Portugal's Portucel Industrial said that stocks of eucalyptus pulp have fallen since February and are expected to drop further in the coming months. Stocks of eucalyptus pulp producers fell 21% in April to 307,000 tons and 16% in March to 391,000 tons. In January this year stocks were 480,000 tons. NorScan stocks have fallen, but eucalyptus stocks have dropped even more according to the spokesperson. The U.S. magazine Forecaster has said that by mid-1997 NorScan stocks would stand at 1.5 million tons, which analysts say is a healthy level. And Friday, under a plan issued by federal foresters, logging in the country's largest national forest will be severly restricted. The strategy cuts in half the maximum amount of timber that can be logged in the Tongass National Forest, which covers much of the Southeast Alaska Panhandle. Coated paper prices are scheduled for another increase effective next month, with free-sheet to jump anywhere between $40 and $80 per ton and groundwood to rise $60 per ton. Inventories have been declining since March and increased demand from catalogs and magazines should help reinforce the action. Corrugating medium prices are also rebounding, with a $40 per ton hike anticipated next month. In addition, some manufacturers are attempting a 3-4% increase in box prices at the same time. Norscan pulp inventories dropped by 221,000 tons during April to a total of 1.737 million tons. US inventories were 598,000 tons, down 26,000 during April. Canada showed the largest decline, down 128,000 tons to a total of 775,000. "Model Portfolio" Update: A very nice week, indeed. Though we performed better than the broader market, we lagged the sector since we still haven't located that exceptional candidate for our idle cash from the "sale" of Fort Howard. Purchase: IP = $40.50, CDP = $49.13, CSAR = $29.00 Last Trade: IP = $47.88, CDP = $55.38, CSAR = $28.88 This Week: Year-to-Date: Model = + 2.40 % Model = + 31.44 % SP500 = + 2.08 % SP500 = + 14.35 % FSPFX = + 3.03 % FSPFX = + 6.79 % Commentary: It is no surprise to many informed investors that the Paper/Forest sector has underperformed the market over the past couple years. Coming off a deep, extended trough which occurred in the early 90's, paper prices rose dramatically through 1994 and most of 1995 only to peak in the later portion of that year. Correspondingly, stock values rocketed during this period with many achieving their all-time highs in mid-1995 when it became apparent that excessive inventories were about to create a downturn. Following a substantial decline in price over the remainder of 1995 and through 1996, we now see many of these stocks approaching their previous highs or establishing new ones. Some examples include BOWATER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOW)") else Response.Write("(NYSE: BOW)") end if %> with a high of $54.38 in 1995 and now trading at $50.50, CHAMPION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHA)") else Response.Write("(NYSE: CHA)") end if %> having a 1995 high of $60.13 which last traded at $50.00, CONSOLIDATED PAPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDP)") else Response.Write("(NYSE: CDP)") end if %> now trading at $55.38 compared to a 1995 high of $64.88, GEORGIA-PACIFIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GP)") else Response.Write("(NYSE: GP)") end if %> with a 1995 high of $95.75 and now trading at $85.63, INTERNATIONAL PAPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> which recently broke its 1995 high of $45.69 and last traded at $47.88, MEAD CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEA)") else Response.Write("(NYSE: MEA)") end if %> which last traded at $63.38 compared to a 1995 high of $64.13, UNION CAMP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:UCC)") else Response.Write("(NYSE:UCC)") end if %> with a 1995 high of $61.25 and now trading at $52.13, WESTVACO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:W)") else Response.Write("(NYSE:W)") end if %> which set a high of $32 in early 1996 and now trades at $31, WEYERHAEUSER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WY)") else Response.Write("(NYSE:WY)") end if %> which closed at $50.50 compared to its 1994 high of $51.25, and WILLAMETTE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WLL)") else Response.Write("(NYSE:WLL)") end if %> with a 1995 high of $72.75 and last traded at $71.75. In fact, our Paper/Forest index is now 1.8% higher than at its 1995 pinnacle. Interestingly, or maybe surprisingly, is how stock prices are now fairly equivalent to the levels established when paper prices peaked and companies were transacting record sales and making record profits, yet here we are at cyclical lows with those same companies recently reporting reduced sales and miniscule earnings or, in some cases, substantial losses. Inconsistent, doesn't it seem? Logically, it could be stated that either 1995 prices were overvalued or current ones are. Unfortuantely, over the short term (whether that short term was the one month in 1995 where our index climbed 15% to a then record high, or the one month just past where it climbed 15% to a new record high) the market is rather inconsistent and logic does not necessarily prevail. However, in the longer term it is still quite obvious that fundamentals rule. With a long-term historical perspective of various measures (my favorite is price-to-sales ratio for this sector), one can discern how current values relate to what might be construed as equitable. Keep them presses rolling !!! TMF Master

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