Monday, February 4, 2019

You Down With RFP?

A cyclical stock I have started to buy is Resolute Forest Products. They make many kinds of wood products including lumber, tissue and newsprint.

The industry has been depressed for many years due in large part to reductions in demand for newsprint. Lately, however, there are signs that supply reductions have finally caught up with the market.

After generating low returns on capital for many years, the company is now solidly back in the black having earned operating income of $365 million in the last 12 months.

This was earned on a tangible book value of just $1.5 billion. Meanwhile, the company trades for just $720 million.

There will always be fluctuations in what this company can earn in a given quarter and year, as they are subject to changes in commodity prices, duties between countries (i.e. trade disputes) and fluctuating cost issues. For this reason, I like to focus on tangible book value in industries like these, because when returns aren't (are) there, capacity will eventually shrink (grow) until the return to tangible book is normal, so I expect intrinsic values to roughly approximate tangible book over the long term. The stock price has been going down lately as lumber prices have fallen, casting a shadow on the company's earnings in the near future.

At the same time, the company has a new-ish tissue division that is still loss-making, but that is expected to start contributing to profits sometime this year. So the company has been doing decently even while carrying this loss-maker, which provides some potential upside in the future.

That said, this is mostly a commodity business. And while they are somewhat diversified as they operate in a number of different forestry products, I only allocate small positions to a company like this. This would be part of my retail/financials/commodities basket where I expect the price to rise but where the risk of bankruptcy is larger than zero.

I have followed this company for more than ten years now, as it was formerly called Abitibi-Bowater before the financial crisis forced it to declare bankruptcy. Furthermore, it has been a favourite among some value managers I follow such as Francis Chou and Prem Watsa, who have held this thing for a number of years.

Disclosure: Author has a long position in shares of RFP


Anon said...


It seems the assets include over $800M of deferred income tax benefits which account for the difference in market value vs book value.

Saj Karsan said...

You are right. I do consider those valuable, though. They saved over $150M in taxes last year from what I recall. While they may take years to materialize, there are some liabilities like that too, so I don't think there's too much of a mismatch.