Paper & Forest Products Company Standard and Poors
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
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