Bank of America Merrill Lynch downgrades Weyerhaeuser Co. (NYSE:WY) to Neutral from Buy given moderate upside it sees from here and limited catalysts in the intermediate term. Lumber & OSB price changes have been decelerating & the firm didn't expects (+) guidance surprise in Wood or catalyst for the shares. Additionally, with China and inflation slowing somewhat, this could have a moderately negative impact on the stock.
BAML downgrades Weyerhaeuser (WY) to Neutral from Buy. The firm has been supporters of WY and its management approach over the years, as it integrated the Plum Creek acquisition and pursued “Operational Excellence” (OpX) initiatives to improve its cost position and earnings (with a particularly trained eye on achieving a cash breakeven cost position in Wood Products even in deeply recessionary conditions). Having said that, with moderate upside from here given BAML's valuation work, and many of the milemarkers from its prior thesis having now played out in one form or another (Canadian duties, higher lumber pricing, etc.), catalysts seem limited in the intermediate term. Given the quarter close as BAML takes a fresh look at the stocks, it believes a Neutral rating is appropriate for WY.
Moreover, year-on-year lumber and OSB price changes have been decelerating, and so the firm didn’t expect a positive guidance surprise in Wood (+20-30% sequential EBITDA growth versus 1Q) or catalyst for the shares (see later in the report) and this commodity price trend will also limit stock price performance. Lastly, with China and inflation slowing somewhat, this has a moderately negative impact on WY shares when BAML looks at past relative stock performance. True, there is some news coming on its Asset Value Optimization (AVO) program for its Western Timberlands in 2Q, but WY has already guided on Real Estate segment EBITDA for this year (~$250mn EBITDA). Land values from AVO West are implicitly captured in the firm's sum-of-the-parts (SOTP) valuation and its overall $35 PO.
BAML's $35 price objective is based on: an assumed midcycle dividend yield of 3-3.5% and dividend of $1.30-$1.40/share, an 18-19x midcycle FFO multiple, a 23-24x midcycle AFFO multiple, and a sum-of-the-parts (SOTP) value, based on forecast midcycle EBITDA or per ton(ne) replacement values.