By Robert Gordon
Continuing my tour through cyclical stocks, today I am going to analyze some large packaging and paper companies. Few, if any, industries took more of a hit than paper companies in 2008-2009. Some companies, like industry leader International Paper Company (IP), have come back smartly; others may never really recover. So, I will delve into the good, the bad, and the ugly.
Neenah Paper, Inc. (NP)
In 2004, Kimberly-Clark Corporation (KMB) spun off its fine paper and technical business to form Neenah. As one might expect from a company like KMB, the independent Neenah has been successful from the start as a niche paper company. Its stock was trading recently at about $23 per share, near the high point of its 52 week range of from $23.75 to $12.92. It has a market capitalization of $347 million, a P/E of 13.1, and raised its quarterly dividend recently to 0.12 per quarter, for an annual yield of 2.1%.
Like other paper and pulp companies, Neenah's market value nearly disappeared in 2009 as the stock sank to as low as $3.30 per share. But revenues, profits, and the stock price have all recovered in turn. In the third quarter of 2011, sales were up 8% year over year to $175 million, and profits were up 40% versus the third quarter of 2011, to $0.42 per share. The company recently announced the purchase of Wausau Paper Corporation's (WPP) fine paper division for $20 million.
Neenah stock has bounced sharply from its 52-week low in mid November. How much upside is left? The mean analyst rating for the stock is a moderately positive 2.0. Yet, beyond 2012, I see the potential for substantial price increases and a rising dividend. It is not too late to get on board.
Rayonier, Inc (RYN)
Jacksonville, Florida-based RYN is a former division of ITT Corp. (ITT) that became a real estate investment trust in 2004. As such, it pays the vast majority of its profits in dividends back to shareholders. RYN stock was trading recently at its 52 week high of $45.37. Its 52 week low is $34.68. It has a market capitalization of $5.6 billion. Its P/E is 20.3, and it pays a quarterly dividend of $0.40, for a current annual yield of 3.6%...
As a REIT, RYN did not suffer as much as other paper and pulp companies, due to its focus on real estate assets. The company owns and manages 2.5 million acres of forestland in the United States and New Zealand. In the third quarter of 2011, it announced the purchase of an additional 250.000 acres of forest in the south central United States. In addition to the real estate, of interest is that RYN owns five pulp and paper facilities in this country.
As for results in the third quarter of 2011, RYN reported revenues up 2% from the year ago quarter, and profits up 39%, to $0.71 per share. RYN is also taking steps to convert some commodity pulp capacity into specialty fiber capacity. It will take until 2013 to make this transition, but when completed, sales margins will improve.
I like RYN a lot. But given its rich P/E and that it is already at its all-time-high price, I believe better values exist in other companies.
International Paper Company (IP)
IP is a leading packaging and paper producer. It supports its business by owning and managing 250,000 acres of forest in Brazil. Its stock was trading recently at a little over $31 per share. Its 52 week range is from $33.01 to $21.55. It has a market capitalization of $13.7 billion, and it is trading at a P/E of 9.8. It has raised its quarterly dividend to over twice where it was a year ago. It now stands at a quarterly 26.3 cents, for an annual yield of 3.4%.
In its third quarter of 2011, IP continued its progress since the grim years of 2008 and 2009, when its stock touched a low of $3.90, with profits up 20% year over year to $1.19 per share. In addition, the company is doing much to ensure future success. It acquired leading packaging competitor Temple-Inland, Inc. for about $4.3 billion. Combined the company will have a 37% share of the corrugated packaging market. Other initiatives include purchasing a 75% interest in an Indian paper company to gain a foothold in that market, and a total of $1 billion in investment to expand and modernize to existing paper mills.
These moves promise leverage to deliver to IP substantial returns in a growing economy. The mean analyst rating is a strong 1.8, and companies such as State Street Corp. (STT) and T Rowe Price Group, Inc. (TROW) have inside positions with more than 5% stakes in IP. I believe in the company as a long holding.
P.H. Glatfelter Company (GLT)
GLT is a leading producer of specialty papers used in everything from book publishing, envelopes, to tablecloths similar products. It stock was trading recently a little over $14 per share. Its 52 week range is from $16.03 to $11.00, and it is trading at a P/E of 14. It has a market capitalization of about $630 million, and pays a quarterly dividend of 9 cents per share, for an annual yield of 2.5%. That dividend amount has been stable since 2004.
In its third quarter, GLT reported sales up 9% from the year earlier, to $416 million, and profits were down from $0.36 a year earlier, to $0.28 per share in the 2011 quarter. The company attributed this loss to such matters as tightening margins, and higher “input” costs.
GLT is working to solve its cost issues. It is retiring early, by four years, a $100 million, 7 1/8 % debt issue, replacing that with revolving bank debt. It also has made investments, such as a $50 million dollar investment to update a German facility. The company implemented a $50 million dollar stock buy back plan last year.
GLT has a mean analyst rating of 2.0, a mild buy. I agree with that tepid view. I think it will have a better 2014 -15 than 2012, so I would rather you invest in other companies.
Louisiana Pacific Inc. (LPX)
Nashville-based LPX is a leading producer of strandboard and related products, principally for the home building industry. It is also a producer of engineered wood flooring and wood siding products. Its stock was trading recently at about $8 per share. Its 52 week range is from $11.63 to $4.41. It has a market capitalization of $1.1 billion. It neither has a P/E nor pays a dividend, for it has lost money for four years in a row.
Because LPX is more of a building products company than a paper company, its business is dependent on the state of the home building sector. While it sells flooring and siding, its largest product group is oriented strandboard. Since the new home building sector has been in the dumps for years, doing serious damage to wallboard and related operators like US Gypsum (USG), so has LPX. It sold nearly $3 billion in product in 2004, but in years 2008 though 2010, it sold $1.38 billion, $1.05 billion, and $1.38 billion, respectively. In the third quarter of 2011, its sales were $351 million, and it is on pace to report overall sales of about $1.36 billion this year.
LPX has not been profitable since 2006. In the third quarter of 2011, it continued that pattern, losing $0.19 per share. The company has just one profitable quarter in the past four years. Its stock traded as low as $1.00 per share in 2009, so obviously has had a nice technical run since then. But how long can it wait to return to profitability? It debt load is modest, at just 37% of capital.
At 3.4, LPX has the worst mean analyst score I have ever seen from those optimistic folks. I believe at present that LPX is overvalued. As such, I see no real upside, and urge you to avoid the stock.