Money in search of reliable earnings has been pouring into paper and wood-products stocks. Wednesday's merger of
has investors wondering if this forest has room to grow.
Many of the leading stocks in the sector are near their 52-week highs.
, which has gained 3.3% since Jan.2, closed Wednesday at $40.75, near its 52-week high of $41.80.
( GP), which has a 52-week ceiling of $36.99, is at $36.92. And both Mead and Westvaco reached new 52-week highs after announcing their $3 billion stock swap. Mead ended at $32.17, just south of the $33.10 high, while Westvaco is at $29.75, compared with a high of $30.71.
Philadelphia Stock Exchange Forest & Paper Products Index
has grown 8.5% since the beginning of this year, compared with the
's 10.5% decline. The
Standard & Poor's Forest Products Index
, meanwhile, has shot up 13.3% over the same period.
Like several other nontech sectors, forest and paper products stocks have become a safe nook for weary investors. Steven Chercover, analyst at D.A. Davidson, said the market's "flight to quality" has propelled these issues. "The sector, while not glamorous, has tangible assets and products that people use day in and day out," he said, "And
the stocks produce earnings, cash flow and dividends for investors."
But Chercover isn't altogether optimistic. The strong U.S. dollar, weak global economic conditions and higher energy costs have chipped away at the earnings of wood and paper companies. And while lumber demand has been propped up by a strong housing sector, prices have come under pressure.
The U.S. Commerce Department recently slapped a 19.3% import tariff on Canadian softwood imports in a bid to counter Canadian subsidies. The move's been contentious. U.S. timber giant
, which has extensive sawmill operations in Canada, said on Aug. 16 it would idle some plants in western Canada amid worries U.S. consumers won't absorb the cost of the hefty duty. The company, which has been entangled in a hostile takeover bid for
for months, said in a prepared statement the new duty would "disproportionately damage cedar and other higher-value coastal products."
"Industry profitability this year, and probably next year, will not be all that strong," said Chercover, also noting that the stocks look "pretty fully valued." Most are trading above what he considers fair value, about six times EBITDA, or earnings before interest, taxation, depreciation and amortization. He maintains a strong buy rating on Georgia-Pacific and the small-cap
Pope & Talbot
"If another sector emerged as the hot sector, then I think money flows might well come out of forest products and other cyclicals," he added.
Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbaum, agreed that the stocks aren't cheap. But Hyman, who likes International Paper, believes the "tremendous consolidation" in the sector over the last few years make the companies "better cyclical plays than they have been in the past."
"I don't believe the 'flight to quality' issue," Hyman said, pointing out that many of these companies "have attacked the issues of supply and cost" through consolidation. Tom Abram, analyst at Dreyfus, agreed, saying the mergers point to "capital discipline" in the industry.
And an economic recovery wouldn't hurt.
"People can wrestle back and forth, but in early 2002, the bias will have to be that the rate cuts are helping the economy," Abram said. "Expectations are going to rise in next six months for economically sensitive stocks, and they'll carry the papers with them."