It was not long ago that the U.S. paper and timber industry expected a solid summer of growth; but weak demand, falling prices and an influx of Asian imports appears to have stunted that growth dramatically.
Most Wall Street analysts now expect second-quarter sector profits to fall sharply below average forecasts -- just weeks after respectable first-quarter earnings made investors believe the business was on an upward track.
"Of 12 companies I look at in the U.S., the miss is over 10 percent on average," said Stephen Atkinson, senior analyst in pulp and paper with BMO Nesbitt Burns. He said the shortfall would be "more severe" than in past quarters.
The scope of the problem became clear last month when International Paper Co. (IP.N: Quote, Profile, Research) , the world's largest forest products maker, warned its second-quarter profits would fall more than 30 percent below expectations at that time on weaker-than-expected sales volumes for paper and industrial packaging.
Just two months earlier, the company had predicted growth for the period.
"We expect International Paper's earnings warning ... to be pretty indicative," wrote UBS analyst Richard Schneider in a recent report. Schneider expects the quarter's weakest performers to include Louisiana-Pacific Corp. (LPX.N: Quote, Profile, Research) , Weyerhaeuser, and Georgia-Pacific Corp. (GP.N: Quote, Profile, Research) , all hurt by lower wood prices.
Wall Street has punished the sector, lowering ratings and price forecasts in recent weeks. The Standard & Poor's Paper and Forest index slid 8 percent in the quarter and is down 15 percent for the year-to-date. By comparison, the broader S&P 500 index is up 0.41 percent so far this year.
CSFB on Monday became the latest brokerage to cut its outlook for paper and timber companies, lowering its 2005 estimate for Weyerhaeuser Co. (WY.N: Quote, Profile, Research) to $4.44 a share from $4.56 and its 2006 forecast to $4.35 from $4.60, reflecting sluggish box demand and higher energy costs.
"Continued lackluster demand and slightly-above-healthy inventory levels have left prices fragile and has encouraged some spot discounting," wrote CSFB analyst Mark Connelly. "We do expect producers to begin addressing the oversupply problem late-summer, but those moves are already overdue," he added.
CSFB's move followed last week's action by Morgan Stanley, which cut price targets for IP and Bowater Inc. (BOW.N: Quote, Profile, Research) .
Lackluster U.S. manufacturing has cut demand for boxes and paper, analysts say. Consumption of packaging products has fallen 1.5 percent in the first five months of the year compared with 2004, said BMO's Atkinson. Producers were forced to lower prices about 5 percent late in the quarter.
"The big thing is the absence of a seasonal recovery in the paper and packaging grades. And looking at wood products, if interest rates keep going up, demand will go down; and certainly we've seen lower pricing in lumber and panels," he noted.
Asian exports of products like coated paper are also pressuring results. China has accelerated shipments to North America in the last year as its paper mills come on line. Some analysts see that trend continuing in the near term.
Still, some investors see beaten-down stocks as a bargain, especially timber businesses.
Brian Hicks, who helps manage $500 million in the U.S. Global Investors' Global Resources Fund, likes building products maker Louisiana-Pacific, since it generates good amounts of cash.
"I think that valuation-wise it's becoming a little bit more attractive," but adds: "It's an aggressive call."