Pile Up Your Portfolio with These Paper Companies

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the past century, paper and paper products has become the most globalized commodity. Global demand for paper products is expected to reach 453 million metric tons by 2015. Let’s find out the long-term strategies adopted by these companies to meet increasing demands and generate higher revenues.

Improving U.S. housing market will drive in revenue

On July 18, 2013, KapStone (NYSE: KS) completed the acquisition of Longview for $1.025 billion. Longview is a leading manufacturer and cost-effectively produces around 1.15 million tons of Kraft paper and containerboard annually. KapStone's containerboard segment will see uplift in sales in Chicago and the west of Chicago region.

The acquisition will also enhance the company's paper segment, making the company a global producer of multi-wall paper, which is growing at about 4% per year. With the increased efficiency from the acquisition of Longview, the company expects to generate earnings per share of $2.65 in 2013 and $3.76 in 2014. It also expects to generate free cash flows of $173 million this year and $285 million in 2014.

Due to the improving U.S. housing market, demand for wood products like lumber and oriented strand board (OSB) is expected to rise between 2013 and 2015. the consumption for wood will grow at 7.6% and 10.5% compounded annual growth rate between 2012 and 2015. The company's Summerville Lumber Mill is ramping up production speed and currently produces 100 million board feet of high-quality southern yellow pine annually.

The price rise expected for lumber and OBS in 2014 will be $389 per thousand board-feet (mbf) and $362 per thousand square feet (msf), up from the current prices of $335 per mbf and $250 per msf. This will drive higher profits for KapStone in the coming years.

Adding well recognised brand through acquisition

In June, Domtar (NYSE: UFS) completed the acquisition of Xerox's paper and print media products business operating in United States and Canada. Xerox is not involved in the paper manufacturing business, but it distributes a wide range of paper products through its brand name. Through this acquisition, the company gained a global brand name under which it will distribute Xerox-branded papers to uplift its sales in the coming years. It will integrate Xerox’s paper product business with its paper segment, generating overall operating profit of $230 million this year and $354 million next year.

To expand its diaper business, Domtar recently completed acquisition of Associated Hygienic Products. The acquisition will help Domtar expand its existing personal care business and develop innovative products in North America. Due to value proposition and quality products, the market for infant diapers is growing in North America. The company will combine its adult diaper division with AHP's baby diaper division to expand its diaper business to over $200 million in earnings before interest, taxes, depreciation and amortization by 2017. Domtar expects to generate synergies of $10 million from its diaper division within next two years.

High earning through increased containerboard prices

International Paper Company (NYSE: IP) generated 50% revenue from its industrial packaging segment which has the capacity to produce 4.5 million tons of containerboard annually. It is the third largest manufacturer of containerboard in the U.S, with a strong customer base in the U.S. and abroad. The prices for containerboard saw an increase last spring by $50 a ton, reaching almost $740 a ton.

With the increase in prices, industrial packing revenue increased to $3.8 billion in the second quarter, up from $3.5 billion a year ago. Even though prices increased, demand continued to rise and customers willingly paid more. this led to increased sales and lower operating costs. International Paper will continue to generate high synergies since the global containerboard demand is expected to increase from 37 million tons in 2011 to 176 million tons in 2015.

the company plans to reduce its debt by $3 billion to $4 billion between 2012 and 2015, with $2 billion in debt already paid down. It recently sold its Temple-Inland building products business to Georgia-Pacific Building Products for $710 million in cash to focus on its paper and packaging business. As per the rule of the Department of Justice, however, it cannot use the full amount for debt reduction; as a result, the company will use proceeds from sale to return cash to its shareholders in the form of dividend.

Last year, the company introduced a dividend payout policy that targets 30%to 40% of its free cash flow, paying annual dividends of roughly $1.45-1.95 in the coming years. The current dividend is $1.20, with a yield of 2.7%. It is expected to increase to 3% in 2014.

Conclusion

All three of the companies featured above are in strong positions to continue making higher profits in the future.

Acquisition has opened the door for KapStone to expand into other cities, leading to an increase in sales. As the U.S. housing market continues to improve, the demand for wood products is likely to increase as well and will generate higher revenue.

Through the acquisition of AHP and Xerox, Domtar will expand both its diaper business and pulp and paper segment. Moreover, the acquired global brand name will help Domtar provide better service to its customers and generate higher revenue.

Improving containerboard prices will benefit International Paper as the demand will continue to increase in the coming years. In addition, its asset sale initiative will reduce debt while it returns the remaining amount to its shareholders.

As a result, I recommend a buy for all three companies.

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Shweta Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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