Jul 13, 2005. /Lesprom Network/. Soft demand has stumped North American paper companies in the first half of 2005, Merrill Lynch & Co. Inc. said Tuesday as it lowered earnings estimates for the industry. “No doubt about it: the start of 2005 for the paper industry has not lived up to our expectations,” said Merrill Lynch analyst Karen Gilsenan. “While there have been some success stories year-to-date, demand and pricing for some grades have come in lower than expected, and costs have remained at elevated levels.” Ms. Gilsenan cut her 2005 and 2006 earnings estimates for Canadian paper makers Abitibi-Consolidated Inc. and Domtar Inc., as well as U.S.-based companies Georgia-Pacific Corp., MeadWestvaco Corp., Smurfit-Stone Container Corp., and Weyerhaeuser Corp. She also cut her 2006 profit targets for Bowater Inc. The softer-than-expected demand could, however, “prove to be just a pause along the paper cycle recovery path,” Ms. Gilsenan said. She noted that even with the lower earnings targets, profit will still rise significantly over the next 18 months as improved demand and continued capacity constraint lead to better pricing. In her opinion, investors “need to be selective” when looking at the industry. Ms. Gilsenan maintained her ‘buy' rating on Bowater, Domtar, International Paper, MeadWestvaco, and Smurfit-Stone, but lowered her price target on Montreal-based Domtar by $2 to $12 to reflect the lower earnings estimates and to bring its forecast valuation in-line with its peers. Shares of Domtar rose $0.03 to $9.47 in Toronto Tuesday. The stock has shed more than third of its value since the start of the year. Investors who want to benefit from the recovery in the paper industry would do well to buy shares of Bowater, Domtar, International Paper, and Smurfit-Stone, Ms. Gilsenan said. “We see significant potential for stock price upside over the next 12 months based on improving earnings and a recovery in valuations.”