Paper & Forest Products Company Standard and Poors

Topics: Paper, Capacity utilization, Supply and demand Pages: 13 (4652 words) Published: April 2, 2013
sisHow to Analyze a Paper & Forest Products Company Standard and Poors (April 2002) The production of paper and wood products alike depends upon timber resources for raw materials, and most companies in the industry produce both categories of products. The markets for those products, however, are often unrelated. Product Mix The first thing to examine when reviewing a paper and forest products company is product mix, which has a heavy bearing on a company’s financial results and future outlook. In recent years, pricing trends for paper products and wood products have rarely moved in concert. When analyzing the product mix of a paper and forest products company, ask whether the firm is predominantly a manufacturer of commodity products or if value-added products account for a significant amount of business. Most of the industry’s products are commodities – goods produced in large volumes with little differentiation among manufacturers. Pricing for commodity products depends on the supply/demand equation and tends to be quite volatile. Value-added products generally have smaller markets, and thus are often impractical for larger manufacturers to produce. Some smaller firms have taken to focus on specialty products, which include premium-coated paper, some recycled grades, and premium grades of bleached board and Bristol. Bristol is a heavy paper that can be either coated or uncoated; it’s used for folders, tags, posters, tickets, and similar products. Smaller firms usually feel that they don’t have the sales and financing muscle to become major factors in commodity markets. They prefer to reduce their dependence on areas where they have little control over selling prices during weak economic times or times of excess supply. Specialty products allow their producers steadier performances during sluggish industry periods, but one should keep in mind that they also cause earnings to be somewhat less exceptional during periods of market strength. Along with the broad-based product areas, it’s important to understand the breakdown of the company’s mix within each category. The factors driving one type of paper or wood product could be quite different from those influencing another. It’s essential to examine the specific market for each paper grade. An investor should examine the company’s products and their level of differentiation and market potential relative to its competitors. In general, a product will have a competitive advantage if it is characterized by high industry concentration and barriers to entry and good supply/demand equation and is differentiated. Factors that influence demand The balance (or imbalance) between supply and demand has a major impact on the industry’s present and future health. To assess the state of this relationship, factors to consider include domestic and international economic prospects; the business outlook for principal customers; the inventory situation in each given product category; and the level of production capacity and planned additions in each grade. These factors have a major influence on each category’s operating rate.


The relationship between supply and demand almost single-handedly determines the level and direction of pricing in a given commodity grade. Pricing is exceptionally important, since it tends to be the dominant factor in determining the bottom line (net income) of companies in the paper and forest products industry. Paper In the paper sector, demand can take on distinct characteristics for different grades. Containerboard, for example, is used in the production of cardboard boxes. Consequently, demand for that grade tends to track the economic cycle, because more products are shipped when the economy is strong. Containerboard is normally one of the first paper grades to revive as the economy emerges from a sluggish period. Hence, for investment purposes, one would tend to favor a packaging manufacturer if an economic upturn loomed. Other paper grades with demand...
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