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Three analysts and top management from nine sector firms examine the paper & forest products sector in this special 42-page Paper & Forest Products issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info507.htm.

TWST: How are you approaching the group today?

Mr. Berler: I am advising investors to remain overweight the paper stocks here in the first half of 2002. We have been recommending our overweighting in paper stocks going back to the fall of 2000, almost 18 months ago. Our view then and continuing through the recent period is that the combination of depressed valuations, unprecedented capacity shut-ins and sharply curtailed capital spending, together with aggressive moves by the Fed to stimulate the economy, would lead to a re-rating of the paper stocks. Historically, the paper stocks outperform the broader market when the Fed is easing and after commodity prices and profits have fallen enough to trigger capacity shut-ins. We believe the macros (i.e., interest rates, yield curve and other indicators of economic recovery) remain favorable.

TWST: Looking back to 2001, how did the stocks perform?

Mr. Berler: The paper stocks outperformed in 2001. The S&P paper index beat the S&P 500 by 8 percentage points, 800 basis points. In absolute dollar terms, paper stocks were flat in 2001. The period of greatest outperformance in the last 18 months actually happened in the fourth quarter of 2000, when we saw a terrific rotation in the stock market, out of the leading TMT (technology, media and telecom) stocks back into basic industry — really value-type names in general. Year to date in 2002, the paper stocks have continued to outperform. They’re up 5.5% in absolute terms, as of March 4, versus the S&P 500, which is now flat for the year.

TWST: What are your favorite names in the group today?

Mr. Berler: Right now we have a collection of recommendations. Some are straightforward plays on a recovery in commodity prices and profits. Other recommendations focus as much or more on company specific drivers of value creation. We’ve been recommending Domtar (NYSE:DTC), Smurfit-Stone Container (Nasdaq:SSCC) and Abitibi-Consolidated (NYSE:ABY) as the three most attractively valued, best-positioned stocks looking out over the next six to 12 months. Domtar is better positioned than any other paper company we follow to deliver both upside earnings surprises over the coming 12-24 months and real cycle-to-cycle earnings growth. The primary driver of both upside and growth will be the four mills Domtar acquired from GP in mid-2001. In volume terms, the mills more than doubled DTC’s exposure to uncoated free sheet from 800,000 tons per year of capacity to 2.15 million tons today. In cost terms, the integration of the four GP mills should enable DTC to restructure its operations and emerge not just bigger but lower cost and more profitable. Restructuring will take the form of machine rebalancing and optimization, freight and distribution savings, and the closure of smaller, older, high-cost machines. The key catalyst for the re-rating of DTC in coming months will be developing signs of firming in uncoated free sheet markets. Uncoated free sheet is the best-positioned product area for an early and sustained recovery in prices and volumes and is DTC’s principal product. Domtar’s significant operational leverage to recovering commodity markets should drive earnings and free cash flow to new highs. We forecast free cash flow to rise from C$414 million in 2001 to C$600 million by 2004, with a total of nearly C$1.2 billion being generated over the next three years. Domtar can create significant value for shareholders by using proceeds to reduce debt and interest expense, repurchasing shares, and making additional value-accretive acquisitions. We calculate that Domtar’s new peak of cycle earnings power is C$2.48 per share, an increase of 76% from the C$1.41 earned in the 1995 peak and 86% higher than the C$1.33 earned in the 2000 peak. Our mid-cycle earnings estimate is C$1.46.

This special issue includes:

1) Paper & Forest Products - In an in-depth (5,900 words) Analyst Interview, Matthew Berler, Managing Director at Morgan Stanley, examines the outlook for the sector including and shares specific stock recommendations.

2) Paper & Forest Products - In an in-depth (3,100 words) Analyst Interview, Anna E. Torma, North American Paper & Forest Products Analyst at Merrill Lynch Global Securities, examines the outlook for the sector including and shares specific stock recommendations.

3) Paper & Forest Products - In an in-depth (3,500 words) Analyst Interview, Mark Wilde, Managing Director at Deutsche Banc Alex. Brown, examines the outlook for the sector including and shares specific stock recommendations.

4) CEO interviews (average 2,500 words). Top management of nine sector firms examine the outlook for their firm and the sector.