The newsprint industry has been one disaster of a sector to invest in. However, as Barron's Andrew Bary pointed out in a contrarian piece on the Bowater Incorporated (NYSE: BOW) and Abitibi Consolidated Inc (NYSE: ABY) merger, this might be a sign this industry is finally bottoming out.

Some relevant stats:

• Bowater shares are down to $23 from a high of $59 in 2000 while Abitibi shares are down from $20 a decade ago to $2.80
• The combined company will be the third largest forest-products company in the US behind Weyerhaeuser (WY) and International The merged company will have 50% market share of the North American newsprint business
• The decline in newsprint demand might have bottomed as demand from emerging markets is beginning to offset the decline in mature markets. Newsprint demand grew 1% last year. However, North American demand decreased 7%
• By 2008, global newsprint demand could increase 2%, according to Citigroup

Citigroup indicates that Bowater's poor first quarter performance might be the bottom for the Canadian-based company and forecasts earnings of $ 1.00 in 2008 jumping to $2.35 in 2009. Citigroup has a target price of $35. Citi also has a $5.00 target on Abitibi.

The merged company also has $2.0 billion of assets it could sell to paydown the $5.6 billion in debt of the combined companies. The merged company will generate revenue of $8 billion.

The newsprint industry is the contrarian of contrarian investments. While most commodities have performed well this decade, this sector has been a disaster. However, it is time to start looking at these two companies. Start listening to conference calls to see if the companies can hit their quarterly earnings targets. If they can, these stocks could have a good run.

Abitibi-Consolidated Inc. (NYSE:ABY) and Bowater Inc. (NYSE:BOW) are very much alike. Both companies are in the paper business. And, yes, both companies have been dealing with the problems of lagging newspapers and magazines growth.

Well, now these companies are going to merge. The new name? It will be AbitibiBowater.

True, it's a terrible name (I'm really not sure how to pronounce it). Then again, the brand really doesn't matter so much because the companies do not sell to consumers.

However, Wall Street loves the deal. Basically, AbitibiBowater should realize tremendous cost savings. The estimate is about $250 million per year.

Currently, Abitibi's stock price is up 27% and Bowater is up 30%.

However, there could be a hitch -- antitrust complications. But, in light of some of the tough foreign competitors and the difficulties in the print market, U.S. regulators may let the AbitibiBowater deal get done.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

MOST NOTEWORTHY: The Kroger Co (KR) and Quest Diagnostics Inc (DGX) were today's most notable upgrades:

• Bank of America upgraded The Kroger Co (NYSE: KR) to Buy from Sell with a $29 target. Due to streamlined distribution and reduced SG&A expenses having closed the productivity gap with Wal-Mart Corp (NYSE: WMT), the firm believes Kroger is well positioned to accelerate growth and modestly increase operating margins.

• JP Morgan upgraded shares of Quest Diagnostics Inc (NYSE: DGX) to Overweight from Neutral as they not only believe the company's results will outperform expectations over the next few quarters, but that management will become more aggressive in the acquisitions market.

OTHER UPGRADES:

• Sterne Agee upgraded Coast Financial Holdings Inc (NASDAQ: CFHI) to Hold from Sell, with an $8.50 target.

• Goldman Sachs upgraded shares of Nova Chemical Corp (NYSE: NCX) to Neutral from Sell, with a $12 target, citing the potential sale of Nova's styrene business.

• Citing the possibility of a merger with Abitibi-Consolidated Inc (NYSE: ABY), Bowater Inc (NYSE: BOW) was upgraded to Neutral from Sell at Bank of America and to Buy from Hold at Soliel Securities.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MOST NOTEWORTHY: Cisco Systems Inc (CSCO), Continental (CAL) and Caterpillar inc (CAT) complete the list of notable downgrades:

• Citing peak employee productivity and margin expansion difficulties, Citigroup downgraded Cisco Systems Inc (NASDAQ: CSCO) from its previous Buy rating and assumed the company with a Hold rating.

• Goldman Sachs downgraded Continental Airlines Inc (NYSE: CAL) to Sell from Neutral on valuation.

• JP Morgan assumed coverage of Caterpillar Inc (NYSE: CAT) with an Underweight rating, downgraded from its previous Neutral rating.

OTHER DOWNGRADES:

• Following CIBC's outlook for the Paper & Forest sector through 2008, the firm downgraded Bowater Inc (NYSE: BOW) to Sector Underperformer from Sector Performer. The broker believes pulp, paper and packaging prices are near cyclical highs.

• Goldman Sachs expects a slowdown in revenue growth and margins in 2007 for TRW Automotive Holdings Corp (NYSE: TRW) and added the company to its America's Conviction Sell List.

• USA Truck Inc (NASDAQ: USAK) was downgraded to Market Perform from Outperform at Morgan Keegan following the trucking company's disappointing Q4, guidance and lack of near-term catalysts.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).