This is investment manager Graham Tanaka's kind of company. Shares of Mercer International (MERCS) have rocketed to 20 lately, up from 12 in mid-January, and he reckons they'll hit 35 in a year. "It fits our portfolio of undervalued stock with a strong growth kicker," says Tanaka, whose Tanaka Capital Management has gained 38.9% so far this year, vs. 21% for the Standard & Poor's 500-stock index.
What's so hot about Mercer, a holding company with interests in paper and finance? It's still a stock short-sellers love to hate: Short interest in Mercer is 1.5 million shares, or 21% of the stock's float. The shorts' contention: Earnings stem mainly from tax breaks. But the shorts may be fighting heavy odds this time, judging by the stock's steady ascent and big leap in earnings.
One of three things could happen, say some big investors: (1) A U.S. paper company with worldwide operations will make a bid for Mercer; (2) a Korean investment firm, Shin Ho Group, which has a 30% stake in the two German pulp-and-paper mills Mercer acquired in 1993 and 1994, will buy a sizable stake in Mercer; (3) Mercer's financial units, mainly lending and insurance services, will be sold or spun off.
Bulls say Mercer has gone "from black sheep to golden cow." In 1993, Mercer bought eastern Germany's Dresden Papier, a maker of wallpaper, recycled printing paper, and paper for corrugated board, and in 1994 it acquired Zellstoff-und-Papierfabrik Rosenthal pulp mill, also in eastern Germany.
Mercer rehabilitated the two plants and made them profitable, says Tanaka. The result: Mercer's bottom line improved quickly. The German government provided Mercer with subsidies for helping to privatize Germany's paper industry. "Even without the company's tax-loss carryforward of $227 million, profits would still come to $2.35 a share for 1995 and $3.25 for 1996," he says.
Ted Wolff, an analyst at the investment firm Mercer, Bokert, Buckman & Reid (no connection), says Mercer is benefiting from a strong pulp-and-paper demand cycle, partly caused by the cutback in worldwide production. He sees the big paper outfits expanding through acquisitions, mainly overseas.