By Matt Doiron
Richard Evans, a Board member at $1.2 billion market cap paper products company Resolute Forest Products Inc (RFP), has filed with the SEC to disclose that he directly purchased 10,000 shares of the company on August 3rd at an average price of $11.48. This acquisition more than doubled Evans's position in the stock. Resolute Forest Products Inc provides newsprint, coated papers, pulp, and lumber and is down 19% for 2012, bringing it to 44% below its IPO price from December 2010. Steelhead Partners, a large shareholder, bought more shares in May at an average price of $15.63. As of this writing the stock is at $12.50, so Evans at least has a substantial paper profit. This was to be expected as insider purchases tend to be bullish signals, but perhaps this purchase signals a turnaround in the stock price of the company.
Steelhead counted as one of the largest 13F holders of Resolute Forest Products Inc's stock in the first quarter of 2012, with 12.7 million shares in its portfolio. The fund, managed by Michael Johnston, had increased this position by 31% in the last quarter of 2011 (see more stock picks from Steelhead Partners). Fairfax Financial Holdings, run by value investor Prem Watsa, had an even larger stake at 17.5 million shares; Fairfax Financial initiated its position in the second quarter of 2011 and has made very little changes to it since that time (explore the rest of the fund's portfolio). Billionaire John Paulson's Paulson & Co reduced its stake in the first quarter but still owned 3.3 million shares at the end of March.
In the second quarter of the year, Resolute Forest Products Inc's 10-Q reported a 3% decrease in revenue compared to the same period in 2011. Due to this decline and also to a number of closing and other restructuring charges, the company lost 20 cents per share versus the 63 cents per share of earnings it had reported in Q2 2011. Resolute Forest Products is now barely profitable so far in 2012 compared to the 94 cents per share it had earned in the first two quarters last year. At its current market cap, the company is priced at 13 times analyst expectations for forward earnings and its enterprise value is only 3x trailing EBITDA, but the newsprint business in particular worries us- we don't understand how this company can generate sustainable growth.
Weyerhaeuser (WY) is another forest products company, but its offerings are more focused on timber and pulp rather than on paper provided to the shrinking print media business. As such, its business has been doing comparatively better recently: in its most recent quarter, revenue rose by 11% compared to the same period a year ago and the stock is up 47% in the last year. However, its forward earnings multiple is quite high at 28 and we don't think that high a valuation is justified. Resolute Forest Products can also be compared to Domtar (UFS) and International Paper (IP), which are more diversified paper companies. Domtar's revenue shrank slightly in its last quarter compared to the same quarter the previous year but grew its margins enough to generate a 9% increase in earnings. It trades at only 9 times forward earnings, and only 10 times trailing earnings, and pays a 2.5% dividend yield. We think it would be a better value than Resolute Forest Products- true, there has been an insider buy, but the stock price has risen 9% since then and excess returns from this point may be limited. International Paper has similar valuation statistics: it too trades at 9 times forward earnings, and its dividend yield is even higher at 3.5%. However, it saw a sharp fall in earnings in its most recent quarter year over year and particularly given the exposure to different industries it may carry as a paper company we would prefer to avoid it.