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Whatever happened to Teldar Paper?

For those of you who don’t get the title’s reference, Teldar Paper was the fictional target of a hostile takeover by corporate raider Gordon Gekko in the now classic 1987 movie Wall Street. Michael Douglas played the Gordon Gekko character and went on to win the Academy Award for Best Actor for the role. Perhaps Douglas’s most famous line from Wall Street was delivered during a scene set at a Teldar Paper shareholders meeting where he sought to persuade investors to accept his takeover bid by encouraging, “…greed, for lack of a better word, is good.”

In the 30 years since “Wall Street” debuted, the paper industry has undergone major reorganization and consolidation of the sort that would have proven Gekko a visionary. Of the 16 forestry products manufacturers that were members of the Russell 1000® Index at the end of 1987, only four remain: Glatfelter (GLT), International Paper Co. (IP), Kimberly-Clark (KMB) and Sonoco Products (SON). The others were gobbled up by the four survivors or added as pieces of diversified portfolios held by companies like Koch Industries. If we play out the ending of “Wall Street” and assume Gekko’s legal troubles sank the Teldar deal, the company almost surely would have been scooped up by a competitor, or merged with one thereafter.

The Russell Style Indexes—segmenting market cap indexes into Growth/Value—also got their start in 1987 and have served witness to the dramatic changes in the US paper industry. The Russell Style Indexes categorize the members Russell 1000 Index as either “growth”, “value”, or some blend of the two styles. As a quick refresher: a growth company can be thought of as being more closely tied to the economic cycle and  as being valued for potential future earnings vs. realized earnings; while companies with market prices that may be discounted relative to their earnings or other fundamental measures are commonly referred to as value stocks.

The classification of a company as growth of value involves using the fundamental characteristics of a company to determine how inexpensive the company is relative to others, as well as how much growth has been realized and is forecast relative to others. Based on the positioning of a company across these measures, its market cap is then assigned entirely to the Russell 1000® Growth, the Russell 1000® Value, or divided between the two.

We can chart the paths of the four surviving real-life Teldar Paper companies: Glatfelter (GLT), International Paper Co. (IP), Kimberly-Clark (KMB) and Sonoco Products (SON); since 1987 using the Russell Style Indexes. In order to put their performance in context, let us first look at how growth and value have cycled in and out of favor through the years using the Russell 1000 Growth Index and Russell 1000 Value Index as our reference.

The Russell 1000 Growth Index outperformed the Russell 1000 Value Index in 14 of the 30 annual periods shown in Figure 1. Across those 14 periods, growth outperformed value by an average of 9.9 percentage points; and in the 16 periods where value outperformed growth it was by an average of 8.3 percentage points. The alternating periods of style leadership are illustrative of what was going on in the economy at the time. The boom and bust of the technology sector between 1999 and 2000 produced the largest swing in style performance observed in the 30 years of live style history. The relative outperformance of value during the mid-2000s reflects what we now know was the unsustainable growth of the financial sector. After the collapse of financials in 2008, growth has led for much of the recovery.

Figure 2 shows the fortunes of our four surviving paper companies have been as varied as the cycle of style leadership. In 1995 KMB completed a $9.4B merger with Scott Paper which paved the way for new growth. Just a year later, IP acquired Federal Paper Board in a deal worth $3.5B. SON and GLT internationalized their operations, but did not strike the type of high-profile deal Gekko would surely have pushed for. In the intervening years, SON and GLT have experienced slower market value appreciation than KMB and IP.

Based on what little information we have from the movie, Glatfelter could be imagined as the most similar to the fictional Teldar Paper Company. GLT was family run for several generations and has remained for the most part a traditional printing paper manufacturer. The company was dealt a blow in the early 1990s when Philip Morris decided to make KMB its sole supplier of cigarette paper. The mass migration to digital medial (vs. print) has also created headwinds for the paper industry. In response, peers like KMB substantially diversified their portfolio of products—focusing on areas like the healthcare sector.

Gordon Gekko wanted to identify, by any means necessary, companies with undervalued assets that could be bought and resold at higher prices—making him something of a nefarious value investor. Similarly, but ethically, the Russell Style methodology identifies companies exhibiting " value" traits using a set of fundamental indicators. Figure 3 presents the value probability of Kimberly Clark—that portion of the company’s market value assigned to the Russell 1000 Value Index—which results from its book-to-price value (Adjusted B/P) in relation to all other stocks in the Russell 1000 Index.

Generally speaking, when the adjusted B/P rises, the value probability is expected to rise as well. However the magnitude of that change may be impacted by shifts in the fundamentals of other companies in the market. For example, Point 1 in Figure 3 shows the adjusted B/P of Kimberly Clark at its highest level in 1995, and a corresponding shift for the first time to value. Point 2 shows an increase in adjusted B/P between 1999 and 2000 which resulted in the largest historical value score for Kimberly Clark within the Russell Style Indexes. This shift should be viewed in the context of a market environment in which the growth style, fueled by what would afterward be known as the “dot com bubble”, was at its crest. At this time, so few companies’ book-to-price values were increasing that the signal from Kimberly Clark was amplified. Kimberly-Clark’s book-to-price fell during the financial crisis which shifted the company back to a predominantly growth style orientation—Point 3. Most recently, at Point 4, the company’s book-to-price value fell as a lump sum retirement program resulted in a drawdown of book value and an increased growth style orientation.

Since the debut of Wall Street, and the 30 years that have followed, the Russell Style Indexes have marked the dramatic changes in the US equity market. The forest products industry is just one example of what makes the Russell Style Indexes foundational benchmarks with which to help structure a US equity allocation. These indexes are accurate reflections of the life cycles that sectors and companies like KMB, IP, SON and GLT go through, moving in and out of favor through time. And they do so using a rules-based and transparent process that doesn't require insider information from corporate raiders like Gordon Gekko to understand.

 

Get a more detailed look at the Russell Style Indexes methodology.

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