As of April 30, 2013, Fairfax Financial increased its position yet again with paper and lumber company Resolute Forest Products by 13.64%, with current shares at 28,156,819. Watsa bought 3,380,300 shares in the average price range of $14.63, making a 1.99% impact on the Fairfax Financial portfolio. Last quarter ending Dec. 31, 2012, Watsa bought 5,797,729 shares of Resolute Forest Products Inc. (RFP), at an average price of $12.15, making a 25.1% gain.
Compared to other paper company competitors– International Paper (IP), with a market cap of $20.48 billion; Weyerhaeuser Co. (WY), with a market cap of $17.04 billion and Sonoco Products Company (SON), with a market cap of $3.51 billion– Resolute Forest Products with a market cap of $1.42 billion, is the smallest and the cheapest stock price for a paper company, and an obvious favorite of Prem Watsa, the largest RFP stakeholder with 29.72 % of shares outstanding.
His holding history:
Resolute Forest is primarily a paper maker, producing newsprint, commercial printing papers and market pulp. But the company also makes wood products such as lumber used in the housing market. Last week, Richard Garneau, Resolute Forest President and Chief Executive Officer, commented on the dramatic surge in housing starts:
Seasonally adjusted housing starts broke 1 million in March, up 47% from the year ago level. Where we started to see the signs of recovery we experienced to date. We continue to move forward with our growth projects, the restart of our Ignace saw mill and the construction of the new Atikokan saw mill. This will further improve our position in the lumber segment for the future.
Last week Resolute also reported the company earnings for first quarter 2013 with a net loss of $5 million as compared to a net gain of $23 million in the first quarter of 2012. On sales of $1.074 billion, the net loss amounted to $0.05 per share. The company’s net income came in at $28 million, or $0.30 per share.
The company is still emerging from a 2009 Chapter 11. Resolute Forest Products owns or operates over 40 pulp and paper mills and wood products facilities in the United States, Canada and South Korea, and sells its products in 90 countries.
Low P/B Ratio - RFP Trades at P/B 0.4– Undervalued?
Value investors prefer stocks with a low P/B ratio as they can hold a potential for future gains if nothing is wrong with the company. The investor must then find out if a stock is undervalued or underperforming.
Up 22% over 12 months, Resolute Forest Products Inc. shares are traded at around $15.20 with a P/S ratio of 0.30 and a P/B ratio of 0.4. In fact, in an industry where the median is 1.4, the P/B ratio of Resolute Forest Products Inc. is ranked higher than 99% of the 181 Companies in the industry, according to GuruFocus research.
While the P/B ratio is never the only way assess an undervalued company, this recent increase by the Prem Watsa seems to confirm that there is nothing fundamentally wrong with Resolute and that its shares are selling at a discount, while representing a fair value and an exceptional buy.
Here’s a look at Resolute's valuation over time:
RFP data by GuruFocus.com
Last week Resolute’s President and CEO Richard Garneau commented, “We made a number of key decisions in 2012. We grew the pulp segment and launched new projects to grow our lumber business. We invested in power cogeneration assets to lower costs and generate EBITDA from external sales of power and we also made difficult decisions to close some machines and mills, and restart lower cost facilities to achieve a leaner and more efficient mill network….We believe that our efforts in the last few years strengthened our competitive position to better mitigate the challenges facing the North American forest product industry, but Resolute will not stand still. We will always be looking for ways to improve our network to reduce cost.”
Prem Watsa is the founder of Fairfax Financial Holdings and has earned the prestigious moniker of “the Warren Buffett of Canada.” The portfolio of Fairfax Financial Holdings lists 45 stocks with a total value of $2.5 billion and a quarter-over-quarter turnover of 14% as of February 14, 2013.
Prem Watsa’s top buys, sells and holdings:
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