Forest product investment analysts air selective, cautious optimism

Forest products company shares were dismal performers in the stock market during 1980s second half, and while the group is expected to turn in only mixed earnings results for 1981, Wall Streeters are advising there may be some trading opportunities ahead for alert investors.

One is industry analyst Robert Quirk of Drexel Burnham Lambert. After recommending late last year and again in February that forest products shares be pruned from investment portfolios, Quirk has warmed slightly to the stocks, switching his investment strategy from "sell" to "neutral."

He has removed sell recommendations from Boise Cascade, Champion International, Georgia-Pacific, Weyerhaeuser, and Williamette Industries. Part of his reasoning is based upon the return of investor interest in the group over the past month or so in response to declining short-term interest rates. Quirk advises moving in and taking advantage of that renewed investor attention.

So, given the uncertain trend of the economy, the possibility that a further decline in interest rates may be ahead, and the interest-sensitive nature of forest products issues, "it appears prudent at this juncture to adopt a less aggressive strategy toward the stocks," says Quirk, who sees from all this a likely trading opportunity. "It's specifically with that in mind that we changed our investment rating from sell to neutral."

Others may move into the forest products stocks, buoyed by the fall-off in short-term interest rates. But Quirk remains wary, having noted that the industry's problems "are far from being fully resolved and that a temporary relapse into a much more competitive environment appears close at hand."

Argus Research Corporation looks for homebuilding to be "fairly weak" in the next few months but is more bullish in forecasting a "strong rebound" later in the year, an upturn that likely will extend into 1982.

If there's one pick out of the group at this time, it's Georgia-Pacific Corporation. Argus recently removed Weyerhaeuser Corporation from its portfolio selector buy list, replacing it with G-P. The big forest products concern's 1980 profits of $2.34 a share were down about 25 percent from the year before, but somewhat better than Argus expected, reflecting comparatively strong residential construction in the fourth quarter.

G-P also is the choice of technical analyst Edward Nicoski of Piper, Jaffray & Hopwood. He points out G-P is considered by some to be among the best-managed companies in either the paper or forest products industries.

The collapse of the housing market is a cyclical and temporary situation that will be eased by declining interest rates and pent-up demand for housing, he believes.

"G-P should be able to capitalize on the positive long-term industry trends in wood products and paper, particularly so because of the company's strong timber position," Nicoski adds. He regards the stock as not only fundamentally undervalued but "intriguing" from a technical standpoint (a way of judging a stock based on buying and selling patterns) as well.

Although Argus expects homebuilding to be fairly soft in the next several months, it sees G-P's earnings rebounding with residential construction to a minimum of $2.75 a share this year and moving "considerably higher" in 1982.

That may be, but Quirk doesn't see the rest of the industry keeping pace with the general market's performance through mid-1981. For one thing, prices in the current quarter for domestic lumber, export lumber and export logs will trail year-earlier levels. "Declining domestic demand, weak export markets and a strong US dollar are likely to keep prices from surging ahead from current levels," he advises.

Quirk also believes industry profits in this year's first quarter will be down from earnings of the past two quarters, as well as from prices in 1980s first three months.

Uncertainty is the watchword from the industry side as well as Wall Street. The generally bearish outlook for the industry in this year's first half, "with no dramatic overnight changes expected" as lumber demand and the housing market continue depressed, is confirmed by Peter Pope, chairman and chief executive of Pope & Talbot, a forest products company based in Portland, Ore.

The company saw its 1980 per share profits slip to $1.80 a share from the record $4.04 earned in 1979.

Here's how Quirk sees the forest products companies logging earnings this year, with the 1981 estimate the first number, compared with 1980s actual results:

Boise Cascade, $4.25 vs. $5.11 netted last year; Champion International, $2. 60 vs. $3.19; Georgia-Pacific, $2.70 vs. $2.28; Weyerhaeuser, $3.25 vs. $2.47; Williamette Industries, $4 vs. $4.28