As of June 30, 2019, the market price of Resolute Forest Products (NYSE:RFP) (“RFP”) was US$7.20 per share, giving a market capitalization of about US$640 million dollars. This was after US$1.50 per share in special dividends that we received in December 2018.
With the appointment of Yves Laflamme as RFP’s new CEO in February 2018, there is more optimism on what the company can do with its four business segments. However, the stock continues to trade at less than five times earnings. It is a very cheap stock but the company competes in highly cyclical industries that are currently facing some head winds.
It has been a disappointment since our initial purchase some eight years ago. It shows how tough it is to turn around a troubled company in spite of the best efforts of management.
In general, our experience with a commodity business that has virtually no pricing power, is to be cautious when management talks about investing in new or modernizing existing equipment that would significantly lower the cost structure compared to its competitors. That may be true for six months to a couple of years, but in time competitors will have a new cost structure that is as competitive if not superior to the company. It is the same treadmill where hardly anyone in the industry can make a decent return for the assets invested in the company. The same story can be seen repeatedly in various commoditized industries. There is no sustainable long-term advantage in a mediocre business with no pricing power. It is important not to get seduced by discount to book value. If the company cannot generate a decent return on book value over a long period of time, that book value is not worth much.
From Francis Chou (Trades, Portfolio)'s semi-annual 2019 Chou Associates Fund shareholder letter.
