Pa. paper company takes stock of itself--and likes what it sees

December 23, 1990|By Diana B. Henriques | Diana B. Henriques,New York Times News Service

NEW YORK -- In the interest of full disclosure, the author of this column is a biblioholic whose favorite possessions are all cataloged in the Library of Congress and whose patron saint is Elbert Hubbard.

Hubbard, writing almost a century ago in The Philistine magazine, warned that "this will never be a civilized country until we expend more money for books than we do for chewing gum." His disciples see a bookstore purchase as a contribution to the advancement of civilization.

The odds are that those purchases, seasonal and otherwise, also contribute indirectly to the coffers of the P.H. Glatfelter Co., an utterly endearing corporation based in Spring Grove, Pa.

The Glatfelter people, in business for more than 125 years, make the paper that makes the books that fill the shelves and shopping bags of America.

But while the rest of us have been buying books, the Glatfelters have been shopping, too -- for their own shares, traded on the American Stock Exchange. The company apparently thinks its stock is a fine long-term investment. And some savvy Wall Street investors agree.

Paper and forest-product stocks have recently begun to outperform a sluggish market, but paper manufacturers generally are not a popular choice when recession is at the door because they are seen as incurably cyclical, zigging and zagging with each spasm in the economy.

However, P.H. Glatfelter is not really in the same boat as, say, the Weyerhaeuser Company or Georgia-Pacific. Its specialty is uncoated publishing papers of all sizes, with a growing sideline in recycled printing stock.

Jean M. Auel's latest best-seller, "The Plains of Passage," is printed on Glatfelter's recycled paper, for example, and the company has supplied the stock for countless Book-of-the-Month Club editions, including Anne Rice's "The Witching Hour" and Steven King's "Four Past Midnight." Indeed, about 30 of every 100 pages that are bound between hard covers these days are made by Glatfelter.

This niche business is less cyclical than the market for commodity grades of paper, but no one in Spring Grove, or on Wall Street, would suggest that the Glatfelter company is immune to hard times.

(It is not unfamiliar with them either; surviving the Great Depression with one's business more or less intact probably puts today's economic downturn into perspective.)

Although the company managed to generate strong sales in the first nine months of this year, earnings were lower than in the same period last year, as higher labor costs and lower product prices have squeezed profit margins.

The current quarter looks strong, said M. Alanson "Jake" Johnson II, the company's chief financial officer, "but obviously, we don't know how tough it will be going forward."

Nor is the Glatfelter company untouched by the increasing concern about the environment. Long careful with its production processes, it plans to spend about $125 million over the next few years to make its Spring Grove pulp mill more nature-friendly. Even for a company with 1989 sales of more than $600 million, that is real money.

But there is one current problem this old-fashioned company does not worry about: the credit crunch. It seems to view debt the way an intelligent teetotaler views alcohol -- a substance with some rare medicinal uses but one that should never be used habitually.

The company borrowed $179 million in May 1987 to buy the Ecusta Corp., which makes the wispy-thin paper sold to cigarette manufacturers. The therapeutic purpose was to expand the company's business into a more recession-resistant line. Nevertheless, by September 1989, the loan was fully paid off.

At the same time, the company has sustained a pace of growth in its sales and earnings that would be the envy of many heavily leveraged companies. Analysts for Mabon, Nugent & Co. note that Glatfelter's average annual return on equity and return on assets over the past decade "are the highest in our paper universe, outpacing the group averages by 50 percent and 90 percent respectively."

They expect Glatfelter to generate a 20.7 percent return on shareholder equity this year, dipping to a still-respectable 17 percent next year.

But Joseph V. Battipaglia, director of research for the Gruntal Co. and an early Glatfelter fan, says the most intriguing thing about the company is how it chooses to use its spare cash. It buys back its own shares -- by the millions.

By 1985, after numerous stock splits, Glatfelter had about 25.8 million shares outstanding, adjusted for subsequent splits. Today, it has just 22.6 million shares outstanding. And last Wednesday, its board authorized the repurchase of another 1 million shares through open-market and private transactions over the coming year.

In October, Mr. Battipaglia noticed that Glatfelter had purchased 800,000 shares from Ruane, Cunniff & Co., the Wall Street investment firm whose nose for investment values is nearly legendary.

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