Shares of Resolute Forest Products (NYSE:RFP), a producer of lumber, paper, and tissue products, are on a tear this morning, up 12.7% through 11:15 a.m. EDT.
You can probably thank RBC Capital for that.
This morning, the investment banker upgraded Resolute Forest stock from sector perform to outperform (i.e. buy), and upped its price target on the shares by nearly 38%, to $5.50, reports StreetInsider.com.
Not all is well with Resolute Paper stock. Yet as RBC explained, while the analyst is "negative on graphic paper markets," it believes that "record lumber prices, especially in Eastern Canada, will more than offset declines in newsprint & specialty paper."
As cash pours in from the lumber business, moreover, RBC believes that Resolute Forest will use that cash "to reduce leverage, which has been a key investor concern."
As well it should be. For a company with such a tiny market capitalization of just $364 million, Resolute's debt load is remarkably high -- $691 million in debt, with just $27 million in cash on hand to service that debt. The good news, though, is that last quarter Resolute finally turned free-cash-flow positive again -- for the first time in a year -- generating $109 million in positive cash profits.
The longer Resolute can keep that up, the better its chances of holding onto today's gains.