This is the blog for sharing on philosophy and ideas of value investments in global stock markets
Thursday, January 31, 2013
Betting on This Forest Product Stock Along With Prem Watsa
The “Canadian Warren Buffett” Prem Watsa just recently added Resolute Forest Products(NYSE: RFP) to own nearly 19.9 million shares in this global forest products company. As of September, Resolute Forest ranked the fourth biggest positions, accounting for 13.3% ofPrem Watsa’s investment portfolio. What is it in the company that Prem Watsa likes so much?
Resolute Forest Products, previously known as AbitibiBowater Inc, with 18 pulp and paper mills, 23 wood products facilities is considered to be the global leader in the forest products industry in nearly 90 countries. The company makes a wide variety of products such as newsprint, market pulp, wood products, coated papers and specialty papers. The biggest source of revenue was newsprint products, more than $1.8 billion, accounting for nearly 38% of $4.75 billion in total revenue. The second largest revenue source was specialty papers, $1.275 billion, accounting for 27.8% of total revenue. It is good that Resolute Forest has a diverse customer base, as no single customer represented 10% or more of the total sales over the last 3 years. In terms of geography, sales mainly happened in the US, of nearly $2.86 billion, accounting for more than 60% of the total revenue, then Canada, Brazil, Mexico, etc.
Emerging from Bankruptcy as a Much Stronger Company
Previously, the business was burdened with huge significant debts, of around $5 billion. In addition, it recorded a huge amount of goodwill and intangibles. That was an extremely weak financial foundation. Indeed, the company had to file for creditor protection in the US and Canada. Afterwards, it had emerged in the end of 2010. As of September 2012, it recorded $3.42 billion in total shareholders’ equity, $343 million in cash, little goodwill and intangibles, and only more than $600 million in interest-bearing debts (including both long and short-term debts). The biggest item in its liabilities was the pensions and other benefits, of $1.5 billion. Interestingly, it had more than $1.8 billion in deferred income tax assets. It would save the company a whole lot of future taxes on its future profitability.
Smallest and Cheapest
Comparing to its peers including International Paper(NYSE: IP), Sonoco Products(NYSE: SON) and Weyerhaeuser Company(NYSE: WY), Resolute Forest is the smallest company, with $1.25 billion in market capitalization, whereas Sonoco is worth nearly $3 billion in the market, International Paper is worth $17.1 billion and Weyerhaeuser is worth $15.32 billion. Weyerhaeuser focuses more on pulp and timber whereas Resolute Forest is focusing on newsprint and specialty papers as discussed above. International Paper is more diversified and Sonoco is for industrial and consumer packaging products.
Valuation-wise, Resolute Forest seems to the cheapest among the four companies. The market is currently valuing the company at only 3.84x EV/EBITDA, whereas International Paper and Sonoco are quite compatible at 7.9x and 7x EV multiples, respectively. Weyerhaeuser is the most expensive with a more than 17.2x EV/EBITDA.
Other Famous Investors and Insiders are Bullish, Too
It its interesting to know that Resolute Forest is in the portfolios of other famous investors. In the third quarter this year, Michael Price owned 435,000 shares; Third Avenue Management of Martin Whitman owned more than 300,000 shares, and John Paulson owned 3.3 million shares. Donald Smith held a much larger position, of more than 9.7 million shares in the company. Of course, with nearly 20 million shares, Prem Watsa is the strongest believer in the potential of the company. Also, in August, Richard Evans, the independent chairman of the board, bought 10,000 shares of the company at $11.48 per share, with the total transaction value of nearly $115,000.
Foolish Bottom Line
Emerging with a much stronger foundation and a huge loss carryforward tax advantage, Resolute Forest will bring a lot of value to its shareholders. On the last catch, it is not only cheap in terms of EV multiples, it is also cheap in terms of P/B valuation, at 0.4x. Investors can’t go wrong by betting on the smallest and cheapest forest product company along with other famous investors.