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Is Resolute Forest Products a Buy?

- By Jonathan Poland

While the combined company can trace its roots back to 1820, Resolute Forest Products Inc. (RFP) is the result of a 2007 merger between two paper and pulp companies - Bowater of South Carolina and Abitibi-Consolidated of Montreal, Canada.

Prem Watsa (Trades, Portfolio)'s Fairfax Financial Holdings has over 25% of its portfolio in 30,548,190 shares of this stock, while Francis Chou (Trades, Portfolio) has over 18% of his assets in 4,571,960 shares. For Chou, the position is the largest in his portfolio, even bigger than his Berkshire Hathaway (BRK-A)(BRK-B) holdings. Watsa continues to bet big on BlackBerry (BB), but Resolute Forest Products is a strong second.


Paper products are definitely still a necessary part of life, but isn't this one of those slowly dying industries? Granted the industry may never fully die out considering the need for home development and redevelopment and usable goods like toilet paper. And, with over 40 facilities in the United States, Canada and South Korea, Resolute is definitely a leader in the industry.

The expansion of the U.S. housing market and the always popular home improvement activity across the country is boosting demand for forest products. Housing starts for August are expected to come in around 1.3 million units, an 8% increase year over year, boosting basic materials. Pulp suppliers are benefiting from solid levels of consumption from the personal care sector, with manufacturers of hygiene products delivering solid returns on investment. With lumber prices 65% higher than a year ago, companies like Resolute look set to turn profitable for the first time in years.

Going forward, the company will have to pivot away from newsprint and into lumber and pulp, where the opportunity for survival and profit is much greater.

This turnaround trade is based on the extreme confidence of two big money managers as the company previously went through a decade of lackluster financial performance. Resolute spent the last five years in the red and has earned $1.29 per share over the last 12 months on $3.6 billion in revenue.

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It does appear, however, that Resolute has stopped bleeding. In 2008, it generated over $6.7 billion in sales and almost every year since, the company has capitulated on the top line. Over the same period, it produced a net loss of $2.4 billion. It's likely the company will last another 200 years, but, as investors, the goal is to first beat inflation and then the market.

Both Chou and Watsa have stuck with Resolute Forest Products, dollar cost averaging into the stock over the last six years at prices as low as $4.35. With the stock now trading above $15, they could start to wind down these positions. Even with the company trading below average industry multiples, it's not a buying opportunity.

Dislcosure: I am not long or short RFP.

This article first appeared on GuruFocus.