Abitibi's Silver Lining

Editor's note: This Stocks Under $10 alert was originally sent to subscribers April 20 at 12:58 p.m. EDT. It's being republished as a bonus for TheStreet.com and RealMoney.com readers.

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In our search to find new ideas for stocks trading under $10, we came across Abitibi-Consolidated (ABY), one of the top newsprint companies in North America, which was recently trading at $2.82. But there's a twist to this story: The company is awaiting word from regulators about a proposed merger, and its shares would trade at about $47 if the merger is completed, according to the terms of the deal. (Abitibi shareholders get .06261 shares of the new company per ABY share.) This adjusted price would be higher than our Stocks Under $10 threshold, and so we can't include Abitibi in our model portfolio. However, we'd still like to take a look at this name.

The newsprint market has been in a secular decline for most of this decade, notably in the advertising space. According to the Newspaper Association of America, an industry trade group, online advertising is expected to grow 25% while print advertising is forecast to decline 2% in 2007.

Also, the industry appears to be getting weaker as newsprint consumption in North America fell 6% in 2006, its worst year-over-year decline in five years, according to the Pulp and Paper Products Council, an international alliance of industry groups.

Based on these statistics, it's no wonder many of the companies in the newsprint industry have seen a considerable decline in their stock prices over the past few years. However, a recent merger and a surprising shift in U.S. trade policy could signal a turnaround in the industry and benefit Abitibi.

The company has seen its share price decline more than 90% since 1997 to lows near $2.25 in 2006. Abitibi has been restructuring its operations over the past few years to compensate for the terrible industry conditions, and its Jan. 29 announcement that it plans to merge in an all-stock transaction with competitor Bowater (BOW) could drive shares higher.

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