Valuation of the Paper and Publishing Industry

Weekly Corporate Growth Report, Feb 21, 2005 by Dolbeck, Andrew

The Paper and Publishing industry covers establishments involved in the creation of paper products, including sheet paper, boxes, envelopes, and printed paper products such as books, newspapers, and periodicals. The publishing segment includes companies engaged in printing activities including letterpress, lithography, gravure, and screen printing, as well as companies that perform services for printers such as bookbinding and platemaking.

According to a report from Fitch Ratings, companies in the US paper and forest products sector are not expected to achieve enough recovery to stimulate significant investment and growth. The paper industry, in particular, faces challenges from rising costs of pulp and energy and declining sales in certain segments such as finished papers. The report did predict an increase in demand over the previous year. "Paper companies should continue to make money next year," Fitch notes, "but on less than a robust growth in volumes."

Modern alternatives may help paper companies avoid the rising cost of wood pulp. South African paper producer Sappi boosted strong first quarter results and is forecasting a strong 2005, due largely to the strong growth in the sales of its coated woodfree paper in the United States and Europe. Despite some price increases in the US, the overall market for woodfree paper remains resistant to price hikes.

Average selling prices for newsprint stood at $580 per ton at the end of 2004, up 9% from the start of the year. Newsprint maker Bowater Inc. intends to raise its newsprint prices by another $35 per ton, or 6%, in March 2005. Abitibi-Consolidated, one of the world's largest makers of newsprint paper, decided to implement a similar increase at the start of the year.

The increasing price of newsprint is having an impact on the newspaper publishing sector. Newsprint represents about 15% of most newspaper companies' costs. At the same time, the sector faces declining sales. According to the Audit Bureau's data, daily newspaper circulation declined 0.9% and Sunday circulation fell 1.5% during the six-month period ending September 30, 2005. Declining circulation figures not only hurt sales revenue, but also advertising, since newspaper companies often set their ad rates based on readership.

The overall publishing sector has profited from the recovering economy. The education publishing sector has benefited from increased state and federal spending for education programs. As the economy improves, increased corporate spending on books and advertising also becomes more likely. Larger publishing houses that carry a diverse mix of products are benefiting from their capacity to adapt to popular markets.

The publishing industry must compete with television and the Internet in providing entertainment and information to consumers. Playboy Enterprises, famous for its monthly magazine, posted its first fourth-quarter profit since 1998 due to sales increases in its video and Internet units. While the company's overall sales have declined, revenues have increased from online subscriptions and video on demand.

Modern media have not eliminated the demand for print information, however. Despite the availability of free television program listings from online and cable television sources, 5 million people still purchase TV magazines each week.

The printing segment of the industry has been struggling with competition and market saturation, forcing many companics to enact cost-cutting measures. Demand from the advertising sector has declined, and so has demand for check-printing services, as more document and financial transactions are handled electronically.

The paper and paper products industry covers a wide range of products and services, including printed checks, business forms, stationary, bulk paper processing, book and periodical publication, and other paper products such as grocery bags and packaging materials. All of these diverse sectors have been impacted by the increasing prices of raw materials and energy. They are also subject to varying demand from consumers and businesses. To survive, companies in the industry need be able to keep prices high enough to offset production expenses. Hopefully, if the economy continues to improve, the industry will see sufficient demand for paper products to remain profitable.

Sources: High Yield Report, Marketing Week, New York Times, PrintWeek, US Dept. of Labor, Value Line

By Andrew Dolbeck

Editor