Forest-products companies that piled on debt to become conglomerates are selling assets as fast as they can, signaling an end to the so-called "integrated" era and leaving investors wondering what to bet on next.
Gone is the decade when companies wanted to sell everything from timber to tissue _ controlling every step in the supply chain to cut costs and boost profits.
"Certainly the conglomerate view was bigger is better, but being big and huge doesn't make you a great investment if you're not nimble at providing the products or services your customer needs," said Steve Chercover, forest-products analyst with D.A. Davidson & Co.
Although the last cards in this restructuring game haven't been played, industry watchers say short-term investors should bet on companies like International Paper Co. and Domtar Corp., which have consolidated around pulp and uncoated freesheet paper in global markets.
Investors willing to wait out the housing slump should consider companies like Weyerhaeuser Co., which has been selling off its paper operations to focus on timber and solid wood products.
"They want to do something very well and make a better margin at the businesses they hold," said Stuart Benway, forest-products analyst with Standard & Poor's Corp., of the revamped U.S. forest products companies.
A number of U.S. forest-products companies have already converted to tax-favored real estate investment trust status, separating their timber and lumber operations from pulp, paper and other manufacturing. These include Rayonier Inc., Plum Creek Timber Co., Potlatch Corp. and Longview Fibre, now a division of Brookfield Industries.
International Paper sparked the latest round of specialization by selling more than five million of its 6.8 million acres of U.S. timberlands in April of last year to focus on uncoated freesheet and packaging grades.
Both MeadWestvaco Corp. and Temple-Inland Inc. subsequently announced they are selling large tracts of timber and other assets. MeadWestvaco is focusing on packaging, consumer and specialty chemicals. Temple-Inland is spinning off its real-estate and financial-services divisions, but keeping its containerboard operations.
Weyerhaeuser sold its fine-paper business to Domtar in March, using the proceeds to help reduce debt incurred during its acquisition phase. The company is now shopping its containerboard and packaging businesses.
Industry watchers say those companies that pick the right products to focus on and manage operations most efficiently will offer the best return for investors. That's particularly true at a time when the Internet is pounding newsprint and other papers and the housing market is in the tank.
"In some measure, you have to take costs out of the industry as a whole to survive declining demand for products," said Dennis Ruggles, forest-products analyst for Fitch Ratings.
The fact that there have been widespread curtailments in various paper grades and solid wood products in North America so far this year is also helping support remaining operations, analysts say.
Topping many investor lists are International Paper and Domtar, both benefiting from strength in the uncoated freesheet market.
IP is expanding production into Russia, Eastern Europe and South America, geographies that are expected to grow rapidly in the coming years, wrote Claudia Shank, an analyst for JP Morgan, in a recent note. IP is also reducing costs and benefiting from a weak dollar. Shank rates IP as "overweight".
Domtar has paid down debt rapidly, is generating solid free-cash flow and is achieving cost benefits ahead of original projections, wrote Chercover in a recent note. Chercover rates Domtar a buy with an $11 price target.
IP stock was trading recently at $32.48, down 22 percent from its year high of $41.57 on July 19. Domtar stock was trading recently at $6.96, down 40 percent from its year high of $11.54 on July 3.
While lumber and panel producers are suffering now, companies like Weyerhaeuser that have held on to their land will still see interest from pension funds and institutional investors over the long term no matter what is happening in the housing market, said Paul Latta, an analyst with McAdams Wright Regan.
Latta rates Weyerhaeuser a buy. Weyerhaeuser stock traded recently at $69.80, down 19.9 percent from its year high of $87.09 on Feb. 27.
Divesting timber assets can have its downside for companies that need a low-cost raw-material supply, analysts say. How they cope will depend on whether or not they signed long-term supply agreements with the buyers of their forest lands.
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