Worldwide Diaper and Tampon Demand Bolster U.S. Paper Manufacturers

By Meryl Baer - September 20, 2012 | Tickers: BKI, IP, MWV | 0 Comments

• Email
• Print

Who thought the birth of Chinese and Indian babies, as well as infants born in overseas countries would eventually result in the resurgence of an American industry, the re-opening of a U.S. paper mill, and additional American jobs?

Who could have projected years ago that the increase in demand for personal hygiene products, specifically diapers and tampons, in growing middle class populations around the world might result in a reduction in U.S. unemployment and spur economic development in hard-hit small towns?

Guessing future trends and estimating product sales, whether consumer staples or fashion and fad items, is tricky business.

But we will happily offer three cheers for the development and continuing growth of a global middle class!

Americans consider their personal hygiene products necessities. But millions of people around the world have not had the disposable income to purchase essential items such as disposable diapers and tampons. These convenience items make life easier, but were out of reach financially. As countries moved from poor third world agricultural-based economies to areas with developing manufacturing bases, standards of living increased and consumer staples became available and affordable. Paper manufacturers have benefitted from these new customers.

Paper manufacturing over the past few decades is the story of the rise of paper products, a fall in demand, and the beginning of increased sales once again. A twentieth century office-intensive work force used lots and lots of paper. A move towards the paperless office never totally materialized, but computers and Internet-based business reduced paper consumption considerably.

U.S. paper mills experienced a huge reduction in manufacturing as the Internet age reduced demand. Paper companies shuttered plants and thousands of people lost their jobs.

That was during the Great Recession.

Fast forward a few years. Increased demand for products members of the global middle class want and can now afford are boosting American paper manufacturing. A product called fluff pulp, the absorbent stuffing essential for diapers, tampons and related products, is manufactured in the south. The raw material for fluff pulp is a fast-growing native tree, the loblolly pine. The U.S., at least for now, has a unique manufacturing advantage for this particular product. International Paper Company (NYSE: IP) recently spent $80 million retooling a paper mill in Virginia to produce fluff pulp. 

The good news is the demand for fluff pulp is growing. Although fluff pulp constitutes a tiny portion of the paper market, worldwide demand is increasing at a rate of about four percent a year.

Take a look at a few statistics for International Paper and some of their competitors.

The first chart illustrates the stock price for four paper companies since 2000. Domtar Corporation, a Canadian firm, has been extremely volatile since its appearance on the NYSE. International Paper, MeadWestvaco (NYSE: MWV) and Buckeye Technologies (NYSE: BKI) plunged with the market during the financial crisis, but all three have steadily moved up since then. Georgia Pacific, not shown on this chart, is another strong industry competitor, but the company is wholly owned by Koch Industries. 

IP data by YCharts

The following table compares several financial ratios for International Paper, MeadWestaco Corporation, and Buckeye Technologies Inc.

The revenue/employee and income/employee ratios are indicators of management efficiency, and Buckeye clearly comes out on top. Buckeye is much smaller than its competitors, but offers a lot of room for growth.

Buckeye's average growth rate over the past five years boasts impressive numbers. EPS is 17.40% and net income 29.96%. International Paper records much lower growth rates, with an EPS of 2.75% and net income of 1.27%. MeadWestvaco comes in with negative average growth rates over the past five years. EPS was (1.79%) and net income (1.89%).

International Paper is a conservative investment that hopefully would remain in a portfolio long-term. There is extra risk with a small company like Buckeye Technologies, but BKI offers more growth potential. Investors will need to keep a close watch on the stock. 

• Email
• Print
• Feedback