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Terry Schumacher

 
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  • Resolute Forest Products - Not As Bad As Many Investors Think [View article]
    Relolute’s suggestion that it might buy or build sawmills in the U.S. South may sound good. However, any activity of this sort by them is likely to be quite insignificant in terms of the overall company.

    Given the fact that West Fraser, Canfor, Interfor, and Georgia-Pacific have been very active in recent years in acquiring sawmills in the South, it will be difficult in the future for any buyer to acquire a sizable amount of lumber production capacity in this region.

    About 48% of the lumber production capacity in the South is now owned collectively by five companies; Weyerhaeuser, West Fraser, Georgia-Pacific, Interfor, and Canfor; and these companies won’t be sellers of mills. The remaining 52% of the total production capacity is owned by many small companies, which in many cases own a single mill. Consequently, it will be difficult and take a lot of time and effort to acquire a sizable new presence in the South.

    A typical sawmill in the South might generate $40 million a year in sales, which is about 1% of Resolute’s total annual sales. This means they would most likely have to buy or build a very large number of mills to have any meaningful effect on the company, and I doubt that they will buy and or build a large number of mills.

    There is one way, however, to get a somewhat meaningful presence in the region with one or two mills, and it is a course of action that an Austrian company is pursuing. The company is Klausner, and they have plans to build two and possibly three giant sawmills in the South. Each mill might have an annual production capacity of 700 million board feet, making each one three times bigger than any other sawmill in the South. These mills are expected to cost in excess of $100 million each, which is a sizable capital investment. However, what makes these mills particularly problematic is making sure that they have an adequate supply of logs. Most logs aren’t transported more than about 75 miles from the forest to the mill, which makes it difficult to find a viable site for these giant mills. Consequently, I doubt that Resolute will go this route of building one or more very large sawmills.

    In summation, Resolute saying that they might buy or build sawmills in the U.S. South is a red herring designed to make investors think they are doing something to address the problem of being a large newsprint and commercial printing papers manufacturer.
    Aug 14, 2014. 01:39 AM | Likes Like |Link to Comment
  • Resolute Forest Products - Recommendation Of A Plan For Changing The Company's Business Portfolio And Earnings Outlook [View article]
    Here are some comments related to your concerns about Tembec.

    Yes, total liabilities rose by $113 million from Sep 2013 to Mar 2014, but total assets rose by $112 million over the same time period in large part because of their heavy capital spending. There is nothing alarming at all in connection with the increase in liabilities, and they have ample liquidity to meet their current financial needs.

    Regarding the quarter, two notable factors influenced results. Earnings were worse than they would have been because of the cold weather, and this negative factor was partially offset by the benefit they received from the weak Canadian dollar.

    Also, it is very misleading to focus attention on earnings that are reported in accordance with IFRS, since there are such large non-cash items affecting the earnings. Yes, they reported a loss of $28 million, but if you exclude the large non-cash items, the loss was $12 million. The biggest portion of this difference is the non-cash loss on translation of foreign debt of $9 million related to their loan of U.S. $305 million. It’s unfortunate that IFRS guidelines force the company to make this adjustment each quarter, when it is virtually meaningless. The only time the conversion will matter in a cash sense is at the maturity date, which is in December 2018 for this obligation.

    I couldn’t disagree with you more regarding Tembec’s attractiveness as an acquisition target. I think the company is ripe for takeover for several reasons. First, they have two very good businesses in specialty cellulose and lumber. Second, the company is on the verge of generating a huge increase in free cash flow, and finally, the stock is very undervalued assuming they do generate this big increase in free cash flow.
    Apr 28, 2014. 09:57 PM | Likes Like |Link to Comment
  • Resolute Forest Products - Recommendation Of A Plan For Changing The Company's Business Portfolio And Earnings Outlook [View article]
    Again regarding Tembec, I too have thought that patience might be necessary before the stock rises significantly. On the other hand I think it’s quite possible that it happens relatively soon.

    It’s pretty easy to see how free cash flow can increase dramatically from 2013 to 2015 just from lower capital spending and lower contributions to the pension fund. Furthermore, if lumber prices rise as much as I think they might, and the payoff from the recent capital spending is decent, the increase in free cash flow will be huge. When investors start to actually see this, I think the stock will soar, if it hasn’t already risen significantly.

    Another thing that would cause a quick rise in the stock price would be an acquisition offer by Resolute or some other potential buyer.
    Apr 23, 2014. 10:04 PM | Likes Like |Link to Comment
  • Resolute Forest Products - Recommendation Of A Plan For Changing The Company's Business Portfolio And Earnings Outlook [View article]
    Regarding Tembec, it’s not clear to me what you are describing, when you say that “costs totaled 81% of revenue before tax.” It is not the case, but if pre-tax income were 19% of sales, that would be fantastically good.

    Secondly, I suspect the $800 million in total debt that you cite is actually the Can$821 million in long-term liabilities as of 12/28/13. Long-term debt was Can$414 million of that total, and with current debt of Can.$77 million, total debt was actually Can.$491 million (U.S.$459 million). The long-term debt to equity ratio was 1.63 at 12/28/13, and that is reflective of a highly leveraged balance sheet. However, it is quite manageable.

    Regarding why the stock is so undervalued, part of it is that there are only two or three sell-side equity analysts providing research coverage on the company, and there is a relatively limited awareness on the part of investors about the company.

    Secondly, I think a lot of the limited number of investors that are aware of the company may be taking a wait and see attitude related to the company’s heavy capital spending which began in 2012 and will be ending this year. They may be waiting to see, if this spending actually does generate significant incremental earnings.

    Also, the stock valuation may be penalized based on a perception that the company has excessive debt, which may be unmanageable. However, I think this is a case where perception differs from reality.

    And finally, I come up with a very high valuation for the Tembec's stock (Can$9.00 per share) using a discounted cash flow model in part, because I think lumber prices will be significantly higher over the next several years compared to where they are now. A lot of investors don’t have any basis for having any confidence about this one way or the other. So here is another instance where they will just wait and see.
    Apr 23, 2014. 05:55 PM | Likes Like |Link to Comment
  • Resolute Forest Products - Recommendation Of A Plan For Changing The Company's Business Portfolio And Earnings Outlook [View article]
    I don't disagree that an enterprise value to EBITDA multiple of 8.5 might be too high for a pure-play newsprint producer. In fact I am surprised that Norske Skog is valued that richly.
    Apr 23, 2014. 01:15 PM | Likes Like |Link to Comment
  • Forget BlackBerry: Watsa's Resolute Forest Products Investment Gets More Bang For Your Buck [View article]
    It’s not surprising that Resolute is more cheaply valued relative to near-term earnings than the other companies you cite, given the fact that newsprint is a much larger part of Resolute’s sales mix than the other companies. Weyerhaeuser and IP produce almost no newsprint, and at UPM and Oji newsprint is around 10% of total sales. However, at Resolute newsprint is about 33% of sales.

    Unfortunately for Resolute, the long-term earnings outlook for newsprint might be described as somewhere between challenging and dismal. This is based on declining readership of newspapers.

    That said, I do think the stock may be somewhat undervalued, and a near-term catalyst that could boost earnings and perhaps the stock price is a significant increase in lumber prices, which is something that I expect to happen.
    Oct 3, 2013. 11:11 PM | 2 Likes Like |Link to Comment
  • West Fraser Timber Is A Strong Buy With Significant Upside Potential [View article]
    In my lumber market outlook posted on my Instablog on July 5, 2013 I indicated that given the big price decline in lumber this past spring and the associated limited buying, there should be a significant price increase from the low in mid-June to a high in August or the first part of September as the pace of buying picks up. Specifically, I indicated that the price of SPF 2x4s could possibly reach a high of $360 per MBF, but that there could then be a sell off to a seasonal low, which normally occurs in October.

    In fact a rally has occurred this summer with the price of SPF 2x4s rising from $287 per MBF in mid-June to a current price of $342 as of mid-September. However, whereas I was previously anticipating a sell off following this rally, I am no longer looking for a seasonal decline in price.

    This change in price outlook is primarily driven by a continued high level of exports of lumber from the U.S. and Canada to China, and the expectation that these exports will stay at a high level. When lumber demand for exports is combined with demand from U.S. housing starts, the exports can significantly offset the normal seasonal decline in demand and usage of lumber from just housing starts.

    This more bullish outlook for the price of lumber may be strengthened even further because of declining production. The latest U.S. and Canadian production data for the month of June shows a significant decline from the recent peak in April, and this lower level of production may have continued for the summer months.

    Furthermore, throughout the period of the summer rally, both mills and lumber buyers have remained cautious in their selling and buying. Mills have tended to focus more on maintaining solid order files rather than on raising prices, and at the same time buyers have not built large inventories. The effect of this behavior, which I expect to continue, is to keep prices from being vulnerable to a period of decline.

    I now believe the price of SPF 2x4s could possibly reach a high of $400 per MBF by the early part of 2014 without a normal seasonal decline in prices occurring. In part this increase in price should be supported by the normal tendency for Canadian production to be at a seasonal low in December.

    I believe that being long lumber futures is the best way to take advantage of this price outlook. Owning large lumber producers like West Fraser and Canfor would make sense except for the fact that the stock prices are already reflecting the expectation of higher lumber prices and are trading near all-time record highs. I am long lumber futures.
    Sep 15, 2013. 04:55 AM | Likes Like |Link to Comment
  • Why Your Next Safe-Haven Metal Should Be Less Yellow [View article]
    Good article.

    You’re probably right about the price of platinum going up. However, the bullish case for palladium is even more compelling, and I think the price of palladium can go up a lot more than platinum on a percentage basis.

    Most of the fundamental factors you cite that are bullish for platinum are also bullish for palladium. In some cases this is because the palladium that is mined in South Africa is a by-product of platinum mining.

    Globally the volume of mine production of palladium is moderately higher than for platinum. However, when you look at all elements of supply and demand, there is a bigger supply deficit for palladium than for platinum. This is the main reason why palladium should go up more in price than platinum.

    I agree with your comment that the platinum/gold price ratio is a subjective metric, since they are substitutes in only a limited way, mainly jewelry. However, palladium and platinum are substitutes in significant ways, for instance auto catalysts; so the palladium/platinum price ratio is a very meaningful relationship. Currently palladium is trading at less than half the price of platinum, and I don’t think it’s crazy to think that palladium might trade at a premium to the price of platinum at some time in the future. In fact the price of palladium has exceeded the price of platinum at times in the past.

    Finally, I have been following the gold market for decades, and at times have owned the metal or derivatives. However, I have always been extremely wary regarding the price, because as you point out, there is only a small amount of industrial and commercial use. Your reference to “perceived value” is a very succinct phrase that accurately depicts the uncertainty about the price of gold.

    I got long palladium futures following the big price decline in the first half of April, and I might hold this position for an extended period of time. For investors that don’t trade futures, the palladium ETF, ETFS Physical Palladium Shares (PALL), is a good way to make an investment in palladium.
    May 6, 2013. 06:20 PM | 1 Like Like |Link to Comment
  • Plum Creek: If A Tree Falls In The Forest [View article]
    I agree that timberland can be quite attractive as an investment. However, as with all investments valuation is critical, and I think your comparative valuation table in which you calculate enterprise value per acre may be very misleading.

    Firstly, not all timberland is worth the same with dramatic differences in value being based on characteristics such as specie of timber, age, and location. Secondly, timberland is a much larger part of Plum Creek’s business mix than at Rayonier and Weyerhaeuser.

    Your valuation comparison shows Rayonier and Weyerhaeuser being much more richly valued than Plum Creek on an enterprise value per acre basis. However, this is what you would expect, since non-timberland activities are a much larger part of the business mix at Rayonier and Weyerhaeuser than at Plum Creek, and no value is being attributed to these non-timberland businesses.

    To do this valuation comparison more correctly you would subtract an estimate of the value of the non-timberland businesses from enterprise value and divide this amount by the acres of timberland. However, even this better calculation does not take into account the fact that all timberland is not worth the same amount per acre.

    Finally, I haven’t performed the calculation in this more correct manner, since I don’t know the value of the companies’ non-timberland businesses. However, I suspect that the valuation comparison might be very different from what you have calculated, and Plum Creek might not be under-valued relative to Rayonier and Weyerhaeuser.
    Oct 27, 2012. 08:47 PM | 2 Likes Like |Link to Comment
  • LSI Industries: Significant Upside Potential From Transition To LED Lighting [View article]
    The big decline in the stock price from late 2007 to early 2009 is what you’d expect based on EPS going from $.93 for the YE 6/30/07 to $.01 for the YE 6/30/09.

    Regarding the Philips and other brands of LED bulbs you see in the home centers, these have little to do with the business that LSI conducts. This kind of LED product is intended to a large extent for use in the home. This is probably one of the last uses of LED technology that will gain widespread acceptance because of the high up-front cost, even though it is cheaper in the long run due to lower energy use and longer life than incandescent bulbs and maybe even compact florescent bulbs.

    However, Philips is a competitor of LSI in connection with supplying LED and other lighting products to gas stations and other retailers. They’re both, along with other suppliers these products, going to get this kind of business. I like owning LSI, because LED products are a relatively large and growing part of their total sales mix, more so than most other LED product manufacturers like Philips.

    Also, I like owning LSI for its exposure to LED lighting products even more than a relatively pure play LED company like Cree. I may be wrong on this, but I think the manufacturers of LED fixtures will make more money from the transition to LED lighting, than the chip and materials manufacturers will.
    Oct 11, 2012. 04:02 PM | 1 Like Like |Link to Comment
  • LSI Industries: Significant Upside Potential From Transition To LED Lighting [View article]
    I've been long less than one week. Average cost on my current position is $6.70 per share.
    Oct 9, 2012. 12:22 PM | Likes Like |Link to Comment
  • Natural Gas Storage Still On Sustainable Path [View article]
    I appreciate the fact that you included a spreadsheet in your article. I have done this very same kind of modeling, and I have compared your forecast with mine for the period of May through the end of the refill season, which is the end of October. The biggest differences are that you are forecasting more production and net imports, which represents more supply than I am. However, you are also forecasting higher electricity consumption, which represents more demand than I am. The end result of these largest differences along with relatively small differences in the other kinds of consumption is that you are forecasting a net injection through the end of the refill season of 1,267 Bcf, and I am forecasting 914 Bcf.

    Since working gas in underground storage was 2,576 Bcf at the end of April, you are forecasting 3,843 Bcf at the end of October, which is very close to the maximum during the prior five years for that time of the year. My lower estimate of net injections would result in 3,490 Bcf, which is just a little above the minimum during the prior five years.

    I’m not saying that my forecast is any better than yours, but I did want to contrast what both of our forecasts for this six month period represent in terms of year over year changes in the three areas, where our estimates differed the most. Your forecast is that production is 3.2% higher than the same period in 2011, whereas I am forecasting only a 0.5% increase. Similarly, you are forecasting that net imports decline by about 12% from the prior year, while I am forecasting about a 28% decline. Since you don’t show imports and exports separately I can’t be sure what the source of the difference is. In my model imports decline by about 10%, while exports increase by 15%. Finally, your forecast is that electricity consumption is about 23% higher than the same period last year, and my estimate is 20% higher.

    I think both of our forecasts are bullish for natural gas prices in the coming months. It will be interesting to see how things actually play out.

    Disclosure: I am long natural gas futures, Ultra Petroleum (UPL), and Exelon (EXC).
    May 13, 2012. 02:15 AM | 1 Like Like |Link to Comment
  • A Bullish Perspective On Natural Gas [View article]
    Look at the bottom portion of the table. It shows the estimated changes in the various kinds of consumption in 2012 vs. 2011 during the refill season. For instance it shows a 988 Bcf or 20% increase in consumption for electric power, which is reflecting the fuel switching from coal to gas.
    May 11, 2012. 03:15 AM | Likes Like |Link to Comment
  • A Bullish Perspective On Natural Gas [View article]
    In my article above I estimated that working gas in underground storage would be 3,785 Bcf at the end of the refill season (the end of October) this year. I now believe a better estimate is 3,472 Bcf, which is close to the minimum level reported for the last five years for that time of the year.

    I generally try to make my financial and operating models as simple as possible, so long as I think they are giving me results that are accurate enough for what I am trying to do and seem reasonable. However, I now think I over-simplified my original natural gas supply/demand model to the extent that it did not take into account imports and exports of gas.

    My estimate is that imports during the refill season will be lower in 2012 than in 2011 and exports will be higher. These two factors represent less supply and more demand in 2012 compared to 2011 than what my original model reflected. Based on reflecting these changes in a revised model, my best estimate is that working gas in underground storage at the end of the refill season will be 3,472 Bcf.
    May 10, 2012. 01:01 AM | Likes Like |Link to Comment
  • A Bullish Perspective On Natural Gas [View article]
    The model is based on the idea that if there were to be no change in production and consumption during the refill season in 2012 compared with 2011, then the increase in the amount of working gas in underground storage during the refill season would be the same in 2012 as it was in 2011. However, since consumption is expected to increase more than production increases during the refill season in 2012 compared with 2011, this should result in a smaller increase in working gas during the refill season in 2012 compared with 2011. This smaller increase is added to the amount of working gas at the beginning of the 2012 refill season to come up with an estimate of the amount of working gas at the end of the refill season.
    May 9, 2012. 08:28 PM | Likes Like |Link to Comment
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