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April 29, 2010 Dear Friend
While we expect LPX to report a small
loss on May 10th for the first-quarter, OSB prices have risen to $385 per
000 sq ft from the $198 we estimate LPX averaged in the first-quarter.
Moreover, costs should fall with volume gains. LPX should generate very
large cash flows in the second- and third-quarters, and we estimate it will
repay all debt in 2010 and 2011 even with a decline to a $275 average OSB
price for 2011. Using a DCF with a 7% discount rate and 2.5% terminal
growth rate due to cash generation, we arrived at a $12 price target and
remain at Neutral. This is a rapidly improving situation, and we would not
view it as a short sale candidate owing to mild debt levels and rapidly
improving cash generation.
We cut our investment rating on Domtar,
which reports earnings tomorrow, to Neutral from Overweight due to price
appreciation. While we raised earnings estimates, we have relatively less
confidence in the uncoated free sheet market, which has declined in volume
every year since 1999 except for 2004. Uncoated free sheet price hikes have
been less robust than those of containerboard, for example, or pulp.
Faithfully,
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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