Free Annual Reports
Paper Stocks Cut, Crumpled, Torn And Shredded
If you are a value investor, you are probably starting to look closely at the many beaten-down stocks to consider bargain hunting for your portfolio. Those with time horizons of two to five years or longer for a given stock investment can certainly pick from enough choices in the battered-stock bin, considering the fallen market of 2008. With their year-low prices and their sky-high dividends, paper stocks, such as International Paper (NYSE:IP), MeadWestvaco (NYSE:MWV) and Weyerhaeuser (NYSE:WY) might be attracting some attention. Let's take a closer look at these stocks.
A Confluence of Forces
In the first half of 2008, the forest and paper industry saw rising costs in pulp prices, which they were able to begin passing on. With the larger economic picture going sour as well as resistance to paying higher paper prices in the newsprint and packaging industries, demand quickly fell. As this malaise worked itself through the economic system, the recession, which began to affect everything, saw newspaper advertisers switch their campaigns toward the internet, and away from print, declining by as much as 20%. This cycle further pressured the cost, revenue and profit structures of the paper companies, which pressured not only earnings in 2008 but the industry going forward. (Find out what you can do when the sun sets on a burgeoning market, in Recession-Proof Your Portfolio.)
Deeper Wounds: Not Just a Paper Cut
Many of the companies in other industries have struggled in the last year and will continue to struggle in 2009, with their stocks' performances at least loosely tied to this earnings performance in the short-term, and more closely in the long-term. That's at least the premise of fundamental and value investing. Many of these companies and stocks will likely rebound robustly, if economic and market history is any indicator. In wounded industries, however, such as the banking, auto and housing industries, their fundamentals going forward are still in question. Sometimes the model is altered permanently. The concern for forest and paper companies is how much of the economic wounding is an indicator of a permanent trend?
Long-Term Concerns
While the immediate revenues, financial foundations and balance sheets of the big forest and paper products companies, such as International Paper are healthy for now, IP's annual earnings were $2.22 a share in '07, projected to finish at $2.03 for '08, but will be sliced to $1.07 for next year. It can be a classic trap for value investors to ignore a bad short-term trend for an assumed long-term improvement. But there are serious secular forces pressing down on the paper industry. The declines in publishing ad revenues and the vanishing of many print publications once predicted have materialized. Print won't vanish, of course, but it is troublesome. Also, with the recession, packagers are looking for other alternatives to containerboard (i.e., cardboard boxes) and will no doubt continue to do so. Pressure fromChina
Caution for Investors
When a stock, such as International Paper is paying an 8% dividend as it is now, you have to carefully examine the reasons why. We feel the reason is related not just to a depressed stock price that will bounce back when the market eventually comes back, but that it is also an indicator of the unhealthy prospects of the paper industry in the long-term. It is possible that these companies will come up with solutions to the difficult market forces they face in the next five, 10 and 20 years. Keep watching the macro-economic developments, as well as the long-term, secular market forces which will continue to press seriously against these companies and their stocks, and heed the warnings.
To learn more about the financial crisis that caused this recession, be sure to check out The 2007-08 Financial Crisis In Review.
A Confluence of Forces
In the first half of 2008, the forest and paper industry saw rising costs in pulp prices, which they were able to begin passing on. With the larger economic picture going sour as well as resistance to paying higher paper prices in the newsprint and packaging industries, demand quickly fell. As this malaise worked itself through the economic system, the recession, which began to affect everything, saw newspaper advertisers switch their campaigns toward the internet, and away from print, declining by as much as 20%. This cycle further pressured the cost, revenue and profit structures of the paper companies, which pressured not only earnings in 2008 but the industry going forward. (Find out what you can do when the sun sets on a burgeoning market, in Recession-Proof Your Portfolio.)
Deeper Wounds: Not Just a Paper Cut
Many of the companies in other industries have struggled in the last year and will continue to struggle in 2009, with their stocks' performances at least loosely tied to this earnings performance in the short-term, and more closely in the long-term. That's at least the premise of fundamental and value investing. Many of these companies and stocks will likely rebound robustly, if economic and market history is any indicator. In wounded industries, however, such as the banking, auto and housing industries, their fundamentals going forward are still in question. Sometimes the model is altered permanently. The concern for forest and paper companies is how much of the economic wounding is an indicator of a permanent trend?
While the immediate revenues, financial foundations and balance sheets of the big forest and paper products companies, such as International Paper are healthy for now, IP's annual earnings were $2.22 a share in '07, projected to finish at $2.03 for '08, but will be sliced to $1.07 for next year. It can be a classic trap for value investors to ignore a bad short-term trend for an assumed long-term improvement. But there are serious secular forces pressing down on the paper industry. The declines in publishing ad revenues and the vanishing of many print publications once predicted have materialized. Print won't vanish, of course, but it is troublesome. Also, with the recession, packagers are looking for other alternatives to containerboard (i.e., cardboard boxes) and will no doubt continue to do so. Pressure from
Caution for Investors
When a stock, such as International Paper is paying an 8% dividend as it is now, you have to carefully examine the reasons why. We feel the reason is related not just to a depressed stock price that will bounce back when the market eventually comes back, but that it is also an indicator of the unhealthy prospects of the paper industry in the long-term. It is possible that these companies will come up with solutions to the difficult market forces they face in the next five, 10 and 20 years. Keep watching the macro-economic developments, as well as the long-term, secular market forces which will continue to press seriously against these companies and their stocks, and heed the warnings.
To learn more about the financial crisis that caused this recession, be sure to check out The 2007-08 Financial Crisis In Review.
by
Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Free Annual Reports
http://sp.fastclick.net/ad/tr/10858-64082-15546-0?mpt=7ec2da7092d244083fbbe34ae078e1ce
