More Bad News for Paper Industry

 |  Includes: CTLUF, UFS, WY
by: FP Trading Desk

Pity the northern makers of pulp and paper. The past few years have seen any pricing gains obliterated by the strong Canadian dollar. Now, with the loonie in full swan dive, energy costs returning to earth and earnings that are meeting and beating estimates, what's their reward? More bad news.

With recessionary forces further driving down demand, analysts are greeting the relatively solid earnings at Catalyst Paper Corp. (OTC:CTLUF) and Domtar Corp. (NYSE:UFS) with strong cuts to their share targets.

Catalyst, for example, reported adjusted third-quarter earnings of two cents a share, beating the consensus forecast of a two cent loss, “as cost containment and pricing momentum offset rising input and distribution costs,” wrote Desjardins Securities analyst Pierre Lacroix. “The quarter demonstrated Catalyst’s ability to post strong results despite poor industry conditions.” And that’s not all: “2009 is currently unfolding as one of the best in Catalyst Paper’s history.”

Similarly, Domtar’s $0.10 adjusted earnings per share landed it dead on analyst estimates. The company’s cost containment is going so well it is now on its way to achieving $250-million in annual synergy savings, up from an earlier $200-million target announced when Domtar combined with the fine papers business of Weyerhaeuser Company (NYSE:WY).

Yet Mr. Lacroix cut his targets for both companies: from C$1.60 to C$1 for Catalyst and from $8.75 to $5.25 for Domtar, assigning both a “buy above-average risk” rating.

Why? Catalyst is strongly leveraged, leaving it more vulnerable to the current credit mess, he wrote. Domtar has reduced its net debt by 20% since March, 2007, but still faces an uncertain pricing environment as the economy stumbles, he wrote.

Still, Raymond James analyst Daryl Swetlishoff is slightly more upbeat on Domtar, rating it “outperform” with a share target of C$5.50.

He wrote:

Domtar is clearly facing economic headwinds with paper demand correlated with office worker employment levels, advertising and direct mail activity. We expect this to result in lower prices for pulp and lumber and lower shipment levels across all segments. However, with aggressive supply management, we expect uncoated freesheet pricing to be more resilient.