Looking beyond the sawdust in stocks of wood-product companies

If the time to buy stocks is when they're out of favor, then the forest products group is ripe for picking. The wood products side of the industry, as opposed to paper production, has been on the skids, keeping pace with the housing slump and high interest rates.

Most analysts don't see a return to profitable wood products operations until mid-1982 at best, and Thomas Farrell at Bache Halsey Stuart Shields predicts that earnings for the 12 months ending next June will be at ''shockingly low levels.'' Some recovery is possible in 1982's second half, ''but results will still be quite poor,'' he says.

Wall Street analysts reckon there were about 1.1 million housing starts in 1981, and are projecting 1.3 to 1.5 million this year, projections that compare with 1980's 1.29 million starts. The 1.3 million 1982 figure estimated by David Wilson at Shearson/American Express assumes lower interest rates. If rates hold close to 1981 levels, then he looks for as few as 900,000 starts.

Forest products stocks generally discount home-building recoveries in advance , typically moving up in price as interest rates begin sliding. ''This time the prices won't move as quickly, because it will take longer for the stock market to be convinced that interest rates are in fact in a downturn because of earlier false alarms,'' says Evadna Lynn, research vice-president at Merrill Lynch.

Indications of just how hobbled the wood products industry is come not only from third-quarter operating results but also from shutdowns of sawmills and growing unemployment. Entering December, 27,416, or 27 percent, of the 102,000 sawmill employees in the Western lumber industry were working short or curtailed shifts. And Western Wood Products Association reports that, of the 756 sawmills in the Western states, 262 were closed and 202 were running at reduced levels.

''It's really devastating,'' says William Dennison, executive vice-president of the Western Timber Association, who calls the present gloomy situation ''the worst depression in 50 years'' for the industry.

A further dark cloud overhanging the industry is an antitrust suit, settled out of court by 85 wood products companies but fought by holdouts Georgia-Pacific Corporation, Weyerhaeuser Company, and Willamette Industries. The three companies recently lost an appeal of a 1978 decision that found them guilty of ''anticompetitive conduct'' in plywood pricing.

Total damages of as much as $2 billion could be levied against the trio. Analyst Farrell at Bache says the potential liability is less than the worst-case $2 billion frequently quoted, ''although still substantial and probably material under generally accepted definitions.'' The three companies plan to request a rehearing of the decision and, if that fails, to appeal the case to the Supreme Court.

Besides the litigation problems, the fundamentals of the wood industry ''are dismal, at best, nor is there any near-term factor which suggests improvement,'' the bearish Mr. Farrell notes.

Still, he says, the sharp drop in stock prices suggests the negatives are being adjusted to, and he says the forest products shares have dipped to an area ''where the downside risk is more discernible and more acceptable,'' adding that the major downside move relative to industry fundamentals is near an end.

At current price levels, researcher Lynn at Merrill Lynch rates as ''straight buys'' Weyerhaeuser, Louisiana-Pacific, Boise-Cascade, Champion International, and Willamette Industries, in that order. Georgia-Pacific is rated ''OK to buy.'' The buys are recommended over a 9- to 12-month period.

Jed Maxwell at Dean Witter Reynolds recommends most forest products stocks at present prices, favoring Bohemia Inc., Southwest Forest Industries, and Louisiana-Pacific. Although the industry is suffering through hard times now, the fundamentals are sound, given prospects for 1982, he says.

''Basically, we believe the entire group can do very, very well over the longer term (three to five years), but these companies we know well and consider particularly worthy,'' Mr. Maxwell says.

The wood products companies have their fingers crossed for a housing recovery in 1982. If the turnaround comes, ''the demand is there to make it both vigorous and sustained,'' Pope & Talbot told its shareholders in reporting a third-quarter loss of $698,000, the company's first quarterly deficit since 1967 .

Similarly, Potlatch Corporation, whose third-period earnings were off 50 percent from a year ago, said it's ''very optimistic'' about long-term prospects and has its facilities ''poised to supply additional product when the economy demands it.''

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