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The paper and paper products industry has numerous market segments ranging from facial tissue to the paperboard packaging segment. The paper and paper products industry provides some overlap with the container and packaging industry in that there are companies in both may produce paperboard. However, for the purpose of this article, we are only discussing producers of containerboard and corrugated containers.

The Paperboard Packaging Council has suggested that the packaging segment will continue to see weakness for the remainder of 2011 due to reduced consumer spending but that an uptick will occur in 2012-14. They also identify several end-use markets with growth potential: pharmaceuticals and frozen and take-out foods.

Tissue Industry

The U.S. tissue market is divided into two market segments: the at-home or consumer retail purchase segment, which represents approximately 67% of U.S. tissue sales; and the away-from-home segment (commercial and industrial venue tissue use), which represents the remainder of U.S. tissue market sales.

The U.S. at-home tissue category consists of bath, towel, facial and napkin products segments. Each category is further distinguished according to quality tiers: ultra, premium, vale and economy. The majority of at-home tissue sold in the U.S. is premium and ultra quality.

At-home tissue producers are comprised of companies that manufacture branded and/or private label tissue products. Branded tissue suppliers manufacture, market and sell tissue products under their own nationally branded labels. Private label tissue producers sell tissue products to retailers who in turn sell the tissue to consumers as the retailers private label brand. Some manufacturers sell both branded and private label tissue products.

Pulp and Paperboard Industry Segment

Solid bleach sulfate (SBS) paperboard is produced for the high-end packaging industry. SBS is a premium paperboard grade that is most frequently used to produce folding cartons, liquid packaging, cups and plates, and commercial printing items. SBS is used to make these products because it is manufactured using virgin fiber produced in a kraft bleaching process, which results in superior stiffness and cleanliness. SBS is often coated with a clay surface, which in many cases provides superior surface printing capabilities. SBS can also be coated with a plastic film to provide a moisture barrier for some uses.

Folding carton is the largest portion of the SBS segment of the paperboard industry. Within the folding carton segment there are varying qualities of SBS. The high end of the folding carton category in general requires a premium print surface and includes uses such as packaging for pharmaceuticals, cosmetics, DVDs and CDs, and other premium retail goods. SBS is also used in the packaging of commodity frozen foods, beverages, and baked goods.

SBS liquid packaging is primarily used in the U.S. for the packaging of juices. In Japan and other Asian countries, SBS liquid packaging is primarily used for the packaging of milk, juice and other liquid items.

Commercial printing applications use light-weight bleached bristols, or heavyweight paper grades, which are used to produce postcards, signage, sales literature, and cover stock for publications such as brochures, presentation folders and paperback book covers, among other things. The customers in this segment are accustomed to high quality paper grades, which possess superior printability and brightness compared to most paperboard grades.

The majority of pulp manufactured worldwide is integrated with paper and paperboard production, usually at the same mill. In those cases where a paper mill does not produce its own pulp, it must purchase it on the open market. Market pulp is defined as pulp produced for sale to these customers and it excludes tonnage consumed by the producing mill or shipped to any of its affiliated mills within the same country.

Our favorites in the paper and paper products industry are Clearwater Paper Corp. (CLW) and KapStone Paper and Packaging Corp. (KS). We find these companies attractive on the basis of valuation and profitability.

Clearwater has a market capitalization of approximately $903 million. The company has a trailing Price/Earnings ratio of 11 and a forward P/E of 16X. The Price-to-Book ratio is 2.2X and Price-to-Free Cash Flow is 4.6X Consensus earnings for FY10 is $4.885; FY11 $6.22; and, FY12 $7.62. Year-Over-Year (3Q10), sales are up about 8% and net income is down about 39%.

KapStone has a market capitalization of approximately $795 million. KapStone is trading at 10.5X trailing earnings and 2.2X book value and 6X free cash flow. Consensus earnings for FY10, FY11 and FY12 are $1.393, $1.456 and $1.745 respectively.

Ticker

Company

Recent Price

Price Change 52 W

CFROI

EV/EBITDA

ROE 12M

Price to 52 W Range

AIN

Albany International Corp.

23.21

16.00

3.48

23.22

5.60

74.03

BZ

Boise Inc.

9.01

71.00

13.69

6.87

14.70

96.42

BKI

Buckeye Technologies Inc.

24.86

115.00

16.23

15.08

22.80

84.55

CLW

Clearwater Paper Corp

78.67

64.00

23.38

6.86

21.60

88.25

UFS

Domtar Corp. (USA)

87.23

80.00

19.68

6.38

14.90

97.80

FBR

Fibria Celulose S.A. (ADR)

15.46

-17.00

-7.45

n/a

-13.70

18.53

IP

International Paper Company

28.44

23.00

5.09

11.56

3.80

88.36

KS

KapStone Paper and Packaging C

17.30

89.00

22.89

7.03

21.00

98.23

GLT

P.H. Glatfelter Company

11.96

-11.00

12.01

14.65

16.90

34.75

SPP

Sappi Limited (ADR)

4.97

17.00

6.63

66.69

3.80

63.43

SWM

Schweitzer-Mauduit Internation

60.38

-20.00

7.98

11.80

16.10

51.68

TIN

Temple-Inland, Inc.

23.85

35.00

3.91

45.84

21.30

87.64

Disclosure: Author has no financial interest in any company mentioned in this article and will not have an interest within 72 hours of this article being published.

Source: Paper & Paper Products Industry: Two Companies Stand Out