Description

Boise Cascade is a US paper company and uncoated freesheet play. The quick thesis is BCC is trading at trough valuation despite the fact that uncoated paper prices are below midcycle levels and increasing in what should be a long cycle. One of the most significant catalysts for the stock occurred several days ago when International Paper announced permanent closure of 6% of the North American uncoated freesheet market (this also represents close to 3% of the global market). BCC is the most leveraged US paper company to uncoated freesheet.

IP's capacity closures will shift the uncoated market from oversupplied to tight. Assuming no demand growth in 2001, the global operating rate will increase from 93 to 96%. The North American operating rate will increase from 91 to 97%. Both levels will clear "pinchpoints" for the industry where inventories have fallen historically and prices have increased.

BCC has $6.50/shr of peak earnings power (it has made $2.16 LTM) and should make $.75 in the next trough (BCC has benefitted from a significant restructuring program the last 6 years-BCC used to lose $4-5/shr during trough years). BCC has peaked at 8-10x peak earnings the last 3 cycles giving it an upside of at least $50. BCC is cheap on many metrics - 6.8x midycle P/E, 3.7x peak P/E, 4.0x midcycle EV/EBITDA, 2.9x peak EV/EBITDA. It also has a $67 NAV based on recent takeout multiples which includes a $1.8 billion value for its timberlands (in line with recent PCL/TGP and RYN/SSCC timber transactions). With regard to downside, US paper companies with similar leverages, returns and caps have bottomed historically at .8-1x book. BCC is currently at .9x book.

Aside from improving uncoated freesheet fundamentals and possible macro catalysts (such as soft landings, Fed easings, any appreciation in the Euro, etc.), BCC is also an attractive acquisition candidate and willing seller. European paper companies have been buying white paper companies in the US and indicate they want to buy more. BCC has third biggest share (10%) of US uncoated freesheet market behind IP and GP. It also has a very attractive distribution business (Boise Office Products) that would be very attractive to a foreign acquiror. Paper distribution businesses have commanded 6-7x EBITDA multiples in takeouts (GP/Unisource). Domestic acquirors such as WY and WLL might also look at BCC in response to the actions of these foreign acquirors and also IP's recent acquisition of CHA which increased its uncoated market share to 39%.

Catalyst

Improving uncoated fundamentals due to capacity closures, possible takeout, possible improving macro conditions