Let's get a few things out of the way right off the bat with Abitibi (NYSE:ABY).
This Canadian producer of newsprint, commercial paper, and wood products is risky with a capital R. This is not the stock upon which to spend your milk money, and this is the sort of opportunity that can burn your fingers.
But it could yet prove to be a value. And that's why I've kept it on my watch list.
Sure, there was both good and bad news to find in the recent quarterly announcement. The company's loss (excluding items) was smaller, and the operating profit was higher. That's good, as was the increase in EBITDA. Higher debt and negative operating cash flow, though, is not so positive. And you also can't ignore that the company's interest payments were twice the size of its operating income -- not exactly a formula for long-term success.
So how could I possibly like this story? After all, aren't newspaper companies like Tribune (NYSE:TRB) and New York Times (NYSE:NYT) looking to cut costs by trimming away newsprint usage through changes like cutting down or eliminating stock quote tables? That's true, but it's also true that newsprint price hikes have been outpacing volume reductions on the whole. What's more, there's growing consumption of newspapers in emerging markets (like China), and free dailies are becoming more popular and common in both Europe and the U.S.
So here's what could go right for Abitibi and make it a value. If the company can cut costs further, that's clearly a positive. If industrywide capacity stays flat or shrinks further (both Abitibi and Bowater (NYSE:BOW) have cut capacity relatively recently), that'd support pricing. And if the industry can push through more price hikes, that'd help, too. Last but not least, stability or declines in energy prices or the Canadian dollar, or both, would certainly help.
I have to admit a certain attraction to companies like Abitibi -- in highly cyclical industries that seem to be ignored and unloved by the larger investing world. After all, how much did you hear about coal or copper stocks on TV four or five years ago? I'm not suggesting or promising that Abitibi is going to experience a run like Peabody (NYSE:BTU) or BHPBilliton (NYSE:BHP). What I'm suggesting is that maybe, just maybe, there's some money left to be made in the paper-making business.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
