With most investors focusing their attentions on high-flyers such as LinkedIn (NYSE:LNKD), many "boring" sectors of the market are going unnoticed. Nothing could be more uninteresting than paper companies. After all, toilet paper, cardboard boxes and fax paper aren't something we really think about on a daily basis. However, rising pulp prices, growing global economic activity and a string of mergers/acquisitions could see the sector rising from obscurity. For investors, the time may be right to add the paper tigers to a portfolio.
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A New Growth Sector
As the digital office has begun to take hold, many investors have abandoned paper companies. This effect was intensified by the recession-driven market sell-off during 2008 and 2009. However, despite the rise of the paperless office, business paper consumption has steadily grown. The average North American office worker uses roughly 10,000 sheets of paper a year. This amount actually rose significantly with the adoption of PCs and e-mail, as more workers print the electronic communication. Total shipments of printing/writing paper in March were 11.7% higher than in February and saw 12.9% growth over March 2010.
Corrugated Box Shipments also Rising
It's not just office paper that is seeing an increase. Improved economic activity has helped corrugated box shipments rise 2% in the U.S. during the first quarter. This follows a 3.5% increase for all of 2010. What's more exciting is this increase is the first sequential increase following such a strong yearly advance since the mid-90s. According to the American Forest & Paper Association, containerboard, boxboard, unbleached kraft and solid bleached folding paperboard all saw production gains for February 2011 versus the same period a year ago. Pulp prices have been strong due to the Chilean earthquake and a Finnish port workers strike. Analysts expect that tight supplies will result in at least a price hike of about $50 a ton on containerboard in the U.S. by this summer.
After the credit crisis hit, many over-leveraged pulp and paper companies fell by the wayside. AbitibiBowater's (NYSE:ABH) recent emergence from bankruptcy protection comes to mind. Stronger and better capitalized firms have been taking advantage of fire sale prices and bankruptcy assets. This is similar to what is happening in the tech and real estate sectors. Mergers will continue to play out within the paper sector. Recently, International Paper (NYSE:IP) made a $3.8 billion bid for Temple-Inland (NYSE:TIN). This follows Rock-Tenn's (NYSE:RKT) recent purchase of Smurfit-Stone.
Adding Those Paper Gains
With some analysts predicting that the paper and container board sector is only halfway through a current upward cycle, investors may want to consider the sector for a portfolio. Funds like Guggenheim Timber (NYSE:CUT) make adding the entire forestry sector to a portfolio easy. However, plenty of individual picks should see gains as well.
Spun off from timber REIT Potlatch (Nasdaq:PCH), Clearwater Paper (NYSE:CLW) produces private label tissue products such as toilet paper, paper towels, napkins and facial tissues to grocery stores. With more consumers switching to private label brands, Clearwater is in a unique position to profit from the trend. Shares of the paper company trade for a P/E of less than 10 and a PEG ratio of just 0.76.
Paper Stock Surging in Brazil Too
Paper growth isn't limited to North America. Brazilian stock Fibria Cellulose SA (NYSE:FBR) saw its net income surge to $241 million in the first quarter. This is a huge increase versus $5.6 million in the year-ago quarter. The stock yields 2.5%, and analysts see at least 14% more upside in the share price. Similarly, South African company Sappi Limited (NYSE:SPP) allows investors to tap into other emerging markets.
Finally, for those investors who may want to bet on the continuation of mega-mergers throughout the sector, KapStone (NYSE:KS), Packaging Corp. of America (NYSE:PKG) and Graphic Packaging (NYSE:GPK) have all been identified as potential buyout targets due to their market caps.
Left for dead by many investors, the paper and packaging sector offers some interesting growth prospects. Rising pulp prices, expanding global economies and a new wave of merger fever are adding excitement to the boring industry. For investors, the time could be right to add the sector to a portfolio. (For additional reading, also see More Mergers In Container Sector.)
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