Nick Hodge,
Publisher
Nov. 5, 2024
I met a grisled old logger named Tom this morning.
He was missing half of his right ring finger and had a pure white handlebar mustache.
I’m assuming he lost the digit in one of the 45 years he’s been turning Ponderosas into pulp in the Pacific Northwest.
My neighbor wants to cut some timber on his land to make more pasture room for his wife’s horse business and improve wildfire safety. The project might make more sense if I add a few of my acres to it, so I moseyed over to meet Tom just as the sun was melting an early inland frost.
I have had a few trees taken off my property before, back in 2017 when we first bought it. It was a breakeven endeavor then, and I told my neighbor, despite his thinking we would actually make money on the project, that it might also be a wash this time around.
It’s worse than a wash.
“The pulp market sucks right now,” Tom said in a deep straight-shooting voice. “As landowners, you’d be paying to have these trees removed. And most landowners don’t want to give away their trees for free.”
He went on to explain that he has three years of work lined up in the area (eastern Washington) but it’s not worth doing now because pulp supply is high and prices are low, so he’s making a backlog of local jobs and instead doing fire salvage work in Idaho.
I asked him what led to these current market dynamics. Commodity prices, as I see it, are back on the rise since the Fed cut rates by 50 basis points last month. I’ve spent the last two issues explaining as much, and I’ve even been looking at timber, among other commodities, for potential investments.
Tom said that high interest rates had led to fewer houses being built, which meant less wood demand. He said that government contract jobs to salvage usable wood after fires had led to ample supply. But he’s already seeing trains full of wood headed east to rebuild after the hurricanes. And he suspects that “come mud in the spring” the industry will have worked through the glut and prices will have recovered, at which point we can all make a little bit of money on our particular project.
The encounter convinced me to make a contrarian bet on the sector.
I am starting a position in Clearwater Paper (NYSE: CLW), expecting the market to start pricing in those spring-time higher prices. Clearwater is a Spokane-based supplier of tissue and paperboard. It was a $55 stock this summer but currently trades at $27 because, as industry analyst Tom told us, the paper and pulp market sucks right now.
Sucks is an astute analysis.
Clearwater made $30 million ($1.75/share) in Q2 2023. In the same quarter this year it lost $26 million. Those earnings were the catalyst for the steep stock selloff.
The company is also digesting the purchase of a paperboard mill in Augusta, Georgia. That constitutes a major expansion for the company, and financing the $700 million purchase has led to some investor trepidation. That mill is expected to add $40 to $50 million to their adjusted EBITDA annual run rate by 2026. That would be a ~18% increase from the $281 million the company delivered in 2023.
Clearwater has had a rough year. It started in January with a closure at its Lewiston, Idaho plant due to extreme cold that led to natural gas supply issues. That event had a $15-17 million impact. More recently, it had to take some North Carolina assets offline because of Hurricane Helene.
The storm is now blowing through.
It announced in July that it is selling its tissue business for $1.06 billion, from which it expects proceeds of $850 million. That deal is expected to close this quarter, and the “plan is to use the proceeds to de-lever our balance sheet and continue executing our strategy to grow and diversify our paperboard product portfolio.” By that they mean paying down some of the $1.137 billion in long-term debt, most of which is from the mill purchase.
I think the stock will move higher as that happens. Blame Tom if it doesn’t.
As it stands, Clearwater Paper has 16.632 million shares outstanding that closed today at $27.12, giving it a market cap of ~$450 million. Look for that to drift back towards $1 billion over the next several quarters as the acquisitions close, the impact of the one-time events fades, and the paper and pulp market improves from its current ‘sucks’ status.
I’m starting with a small position below $26.50.
Editor’s Note: You just read the October 10th issue of Hodge Family Office. We sold Clearwater this week for a profit. Learn more about the publication here.
Call it like you see it,
Nick Hodge
Publisher, Daily Profit Cycle