Domtar Lower As Credit Suisse Talks It Up

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Credit Suisse said it is raising its pulp, paper and bleached board forecasts, but reducing those for lumber and structural panels (OSB and plywood).

"We are increasing our product-price assumptions for most grades of market pulp, paper and bleached board (used in milk and ice cream cartons) for 2011, 2012 and 2013. These grades are benefitting from further recent tightness in the global pulp markets as well as the continued drop in the value of the US dollar. We continue to see these grades achieving peak-of-cycle full-year average prices in 2012, followed by softer conditions beginning sometime in 2013 when global market pulp capacity is slated to increase markedly. In the meantime (e.g., for the next two years), the affected companies, including top pulp/paper picks International Paper Company ( IP ) and Domtar (UFS.TO), should benefit tremendously and experience well-above mid-cycle earnings levels."

Wood Products: "Not So Fast! At the same time, we are reducing our lumber and structural panels (OSB and plywood) price forecasts for 2011 and 2012 by about 3%-5%. Specifically, we now see the Random Lengths lumber composite for 2011 at $285 per thousand board feet ( MBF ), down $15/MBF (or 5%) from before. In addition, we are cutting $15 per thousand square feet ( MSF ), or about 7%, from our benchmark oriented strand board (OSB) 2011 price forecast to $200 per MSF. Both of these major wood products categories should see lower average pricing this year versus 2010."

Good For Our Top 2 Picks - IP and Domtar: "Given that our top two picks, International Paper and Domtar, have substantial exposures to the bleached grades, we are increasing our already above-consensus EPS estimates for these names for 2011 and 2012. While we maintain our $125 one-year target price for Domtar, we are bumping our target for IP by $1 to $42. We note that both of these names provide a more than 40% potential total return based on our target prices and their current dividend payouts."

Near-Term Outlook for Wood Names is Not So Good: "Last week, we downgraded our investment opinion on shares of Louisiana Pacific Corp ( LPX ), a leading near pure-play on OSB, citing seasonal factors. While we believe the 2012-14 period will be quite favorable for LPX, the stock will likely tread water at best over the spring and summer months as 2011 estimates are likely to come down closer to our below-consensus expectations based on this year's tepid wood products pricing environment. Furthermore, we maintain our underperform rating on Weyerhaeuser Company ( WY ). Despite strong management moves to increase shareholder value through the recently-completed REIT conversion, we simply believe WY's shares are overvalued relative to the underlying value of the company's timber assets as well as the earnings potential of its other (wood products, pulp and homebuilding) businesses in coming years."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Commodities

Referenced Stocks: IP , LPX , MBF , MSF , WY

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