Papermakers Come Out Of The Woods

"Paper! Getcha paper!" The cry of the newsboy is, metaphorically speaking, resounding on Wall Street. After nearly a decade of depressed prices, sluggish demand, and near-rampant overcapacity, papermakers are on the rebound. As earnings seem to be bottomimg out, share prices of paper manufacturers are soaring.

So far this year, stocks of paper and wood companies have gained 9.5%, vs. a 1.4% decline in the Standard & Poor's 500-stock index (chart). Among the biggest gainers have been industry giants such as Georgia-Pacific (up 30% since Dec. 31), Louisiana-Pacific (up 59%), and Weyerhaeuser (up 34%). Some brokerage-house analysts are waxing rhapsodic, noting that orders and shipments are on the mend and that prices are firming. Still, investors have some reason for caution. "Some grades of paper have done well, but others are poorly positioned for recovery," warns Mark S. Rogers, an analyst at Prudential Securities.

One of the papers that's not so well positioned is right in front of you. Coated paper is used to make magazines--including this one--and the magazine business, alas, has been mired in recession. Demand is expected to rebound this year, but European competition should still depress prices.

ENVIRO-BOON. For newsprint, the outlook also remains gloomy. Consumption fell 7% last year, but overcapacity should keep prices low, despite an expected rebound in demand. That bodes ill for big newsprint manufacturers such as Bowater and Boise Cascade.

Better tidings are in store for makers of plywood, linerboard, and ordinary uncoated paper. But the brightest prospects of all are out in the forest: large logging operations. Environmental constraints have meant a loss of capacity--a long-term bonanza for the industry. Rogers' favorites include the huge timber companies: Louisiana-Pacific, Georgia-Pacific, Weyerhaeuser, and Willamette Industries, a 31% gainer so far this year.

At first blush, these companies seem pricey. Willamette, for example, is trading at 31 times earnings. But when you look at projected earnings, Willamette is trading at a more reasonable p-e ratio: 20 times estimated 1992 earnings. And as long as ecological concerns continue to squeeze industry capacity, paper and wood companies should go on trading at handsome p-e multiples. As Rogers puts it: "Environmentalists are the industry's best friend."

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