The Wall Street Journal-20080116-Newsprint Makers Take Gamble
Return to: The_Wall_Street_Journal-20080116
Newsprint Makers Take Gamble
For AbitibiBowater Inc. and other North American newsprint producers, 2008 will be a high-stakes game of chicken.
At the same time that online advertising and a slowing U.S. economy are sharply braking newsprint demand, newsprint producers are slashing capacity so fast they are likely to get a price increase in the first quarter.
The result is that, even as many say newspapers are going the way of turntables and typewriters, AbitibiBowater stock at current levels looks like a bargain.
"Short-term, AbitibiBowater is an interesting story and at pretty attractive valuations where it's sitting today," said Paul Quinn, an analyst for Salman Partners Inc. "But it has been incredibly volatile. You have to have nerves of steel with that stock right now."
Mr. Quinn raised his rating on AbitibiBowater stock from a "sell" to a "buy" Monday, with a $21.50 price target.
AbitibiBowater, the world's largest newsprint maker, has seen its stock, on a pre-merger adjusted basis, plunge from $57.62 to $19.40 yesterday in 4 p.m. New York Stock Exchange composite trading, since Abitibi-Consolidated and Bowater announced their plans for a tie-up Jan. 29, 2007.
Investors are spooked by the dismal outlook for newsprint, which makes up about 57% of AbitibiBowater's pulp and paper capacity. Also, AbitibiBowater has about 46% of all the North American newsprint capacity. Canadian-U.S. dollar parity also has roiled the company's cost and revenue structure.
AbitibiBowater is expected by analysts to post a loss of $5.81 a share in 2008, compared with an expected loss of $7.08 a share for 2007, according to FactSet Research. The loss is foreseen narrowing to $1.26 a share in 2009.
AbitibiBowater has taken aggressive action since the merger was finalized in late October. On Nov. 29, the company said it would shut 600,000 tons of newsprint capacity and 500 million board feet of lumber capacity, squeeze $375 million in costs out of operations and sell $500 million in assets. It said a second phase of newsprint closures could come in 2008.
"We believe we have taken bold and decisive action," AbitibiBowater spokesman Seth Kursman said in an interview. "There are a number of pieces to that still unfolding so that, over time, we would hope that the market and investors will act accordingly."
Other newsprint producers, including Vancouver, British Columbia- based Catalyst Paper Corp. and UPM-Kymmene, Europe's second-largest player, also have announced curtailments.
While North American newsprint consumption was down 9.4% through November, publisher and mill inventories fell by 22% September through November, the steepest three-month drop in the past 30 years, wrote Chip Dillon, an analyst with Citigroup Inc. who has a "buy/high-risk" rating on AbitibiBowater stock with a $60 price target.
The result is a turn in the market, at least short-term, said John Maine, vice president of World Graphic Papers at RISI Inc., a forest- products research company. "After significant erosion in prices over 2006 and 2007, prices started to recover in November and are now rising fairly rapidly," Mr. Maine said in an interview.
A $25 per-ton increase late in 2007 has taken hold, and a $20 per- ton price increase in each of the first three months of 2008 has been announced.
"Most, if not all, of that increase is expected to be passed into the market," Mr. Maine said.
On a global basis, consumption has risen 3% to 3.5% per year, which has supported higher newsprint prices overseas. But shipping costs become a factor with oil at $100 a barrel, Mr. Quinn noted.
With the North American newsprint market bottom now pegged in October, the industry will have 18 to 24 months of significant price recovery, Mr. Maine said.
But the longer-term trend is still negative, said Steve Chercover, an analyst for D.A. Davidson & Co. "The faster newsprint suppliers ratchet up prices, the more incentive they provide for their own consumers to substitute away from their product," said Mr. Chercover, who has an "underperform" rating on the stock with an $18 price target.
Newsprint aside, AbitibiBowater has other operations, including market pulp, coated groundwood, specialty uncoated groundwood and lumber, that provide some stability, said Dennis Ruggles, forest- products analyst for Fitch Ratings.
The dormant U.S. housing market has slashed lumber prices, but coated-paper prices have rebounded and market pulp is strong.
The company also persuaded the Communication, Energy and Paperworkers Union to reopen labor agreements a year ahead of the 2009 schedule in an effort to reduce costs.
Still, "it's not enough to offset the newsprint side," said Mr. Ruggles, whose agency has a B- rating on the company's senior unsecured bonds.
Some are also concerned that the company's balance sheet remains highly leveraged, making debt reduction a priority. Citigroup's Mr. Dillon estimates the company's debt-to-capital ratio at year-end was 74%. Some have speculated the company may have difficulty renegotiating its long-term-debt payment schedule given the current credit crunch.
AbitibiBowater spokesman Mr. Kursman said the company can't provide additional financing information that isn't already public, but he said the company will provide an update on financing during its fourth-quarter earnings call.
Shutting down more operations carries another risk, said Stuart Benway, forest-products analyst for Standard & Poor's. "There will be a limit to how much they will shut down, or the combination will not have made sense," Mr. Benway said.
Messrs. Quinn, Chercover and Benway's companies have no banking relationship with AbitibiBowater. Mr. Dillon's has done banking services for AbitibiBowater in the past year.
