Paper-Thin Profits?

The paper and forest products sector, a listless corner of the stock market for most of the last 18 months, is standing tall again--at least for now.

Moderately improved prospects for the industry, a $3.4-billion merger pact between James River Corp. (ticker symbol: JR) and Fort Howard Paper Corp. (FORT), and a huge restructuring announcement by International Paper Co. (IP) have all given the sector a lift in recent weeks.

Also boosting the shares was a spree of second-quarter earnings reports last week showing the companies having generally bounced back from exceptionally poor results in the first quarter.

Since April 15, the 11 stocks in Standard & Poor’s paper and forest products index have surged 35%, easily besting the 20% advance of the broad S&P; 500 index. Fidelity Investments’ paper and forest products mutual fund also is beating the market, with a 23% total return over the last three months.

It’s an improvement long awaited by investors. Figures from Prudential Securities analyst Mark Rogers show that the sector advanced only 24% from 1993 through 1996, while the S&P; 500 charged ahead 47% over the same four-year period.

Now the question is whether the sector’s upturn has any staying power--and there is no consensus on Wall Street.

Consider industry titan International Paper. Its restructuring plan, which includes selling about $1 billion of non-core assets and slashing 9,000 jobs--about 10% of its work force--was warmly received on Wall Street, and IP’s stock has soared 48% in the last three months to close at $57.44 on Monday.

But IP still gets only a “neutral” rating from analyst James Flicker of Lehman Bros. The restructuring is “a good start,” he wrote in a recent report, but “it will take a substantial” rise in paper prices for him to give the stock higher marks.

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The sector was riding high in 1995 in tandem with a sharp increase in prices for paper, packaging goods and building materials that year, when prices for everything from sheet paper to newsprint to boxes shot higher.

But in anticipation of those hikes, customers stockpiled their supplies as quickly as possible before the full force of the increases was felt.

Then, with customers’ inventories full, the paper and forest products companies watched helplessly as demand for more of their products dried up in 1996 and in the first half of this year. That eroded their earnings and their stock valuations.

Prices have firmed up a bit recently, and that has helped some of the sector’s big players--in particular Georgia-Pacific Corp. (GP)--post strong second-quarter profit gains. Firmer prices have also helped fuel the stocks’ rally.

But prices haven’t risen nearly enough to make Wall Street bullish on the group’s overall prospects.

Analyst Charles LoCastro of Donaldson, Lufkin & Jenrette Securities said that although the stocks “now appear to be fully valued” relative to the companies’ expected earnings through next year, they could go a bit higher over the next two months.

But if so, he wrote in a recent report, that simply gives investors “a more attractive exit point.”

Georgia-Pacific also has a major restructuring underway to cut its costs, which is a key reason why Richard Schneider of PaineWebber Group and Mark Wilde of BT Securities both have “buy” recommendations on the stock.

Champion International Corp. (CHA) is another paper and packaging stock that surged this year, and it recently touched a 52-week high of $63 a share before drifting back down. It closed at $60.38 on Monday. J.P. Morgan analyst Mark Connelly still has a “buy” on the stock because of the industry’s improving conditions.

Boise Cascade Corp. (BCC) is also struggling from the drop in prices but is cautiously optimistic. Last week, the company posted a wider-than-expected loss of $16.2 million on sales of $1.3 billion for the second quarter, in good part because of paper prices that were 12% lower than a year earlier. Still, Boise Cascade said its “paper business is expected to post stronger results in the second half of 1997.”

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Louisiana-Pacific Corp. (LPX) also posted a second-quarter loss, of $10.1 million on sales of $633.3 million, but the shortfall was a bit smaller than Wall Street expected. Regardless, analysts are mostly neutral toward the company. Prudential’s Rogers raised his rating after the second-quarter results appeared, but only to “hold” from “sell.”

Louisiana-Pacific, whose stock has been one of the sector’s worst laggards of the last 12 months, with a meager 7% advance, said the loss partly reflected a continued oversupply and lower prices for its “oriented strand” building panels that are used as an alternative to plywood. But it also said prices for its pulp products have been slightly higher.

Weyerhaeuser Co. (WY) also posted second-quarter results last week that gave investors cause for optimism. Although the company’s earnings fell 13% from a year earlier (excluding a special gain in the latest quarter), its latest operating income was above analysts’ expectations. Wall Street responded by bidding the stock to a 52-week high of $60.50 a share, though it closed at $58.88 on Monday.

Analysts said they also were encouraged by Weyerhaeuser’s comments that market conditions for many of its products are improving. But Lehman’s Flicker said investors must remain wary. The risk, he said, is that the restructurings, better market conditions and merger activity that are lifting the stocks now “may not develop as rapidly as investors expect.” That’s worrisome, he said, because most paper and forest products stocks now appear fully valued.

Times staff writer James F. Peltz can be reached at james.peltz@latimes.com

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The Paper Trail

After a long slump, stocks of paper and forest product companies are moving up sharply, but analysts are dubious about the rally’s staying power. Some of the sector’s major players:

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Ticker Monday % change last % change Stock symbol close 12 months from 4/15 Boise Cascade BCC $35.13 +7% +22% Champion International CHA 60.38 +42 +40 Georgia-Pacific GP 92.63 +24 +28 International Paper IP 57.44 +48 +46 Louisiana-Pacific LPX 22.81 +7 +29 Mead MEA 69.25 +29 +35 Union Camp UCC 56.00 +14 +23 Westvaco W 32.25 +9 +23 Weyerhaeuser WY 58.88 +33 +36 Standard & Poor’s 500 +44 +21

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Source: Bloomberg News