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January 18, 2012 Dear Friend,
The upturn in
multi-family housing starts, employment and diverse favorable U.S. economic
statistics caused us to take a closer look at the upside potential of
wood-related stocks. We looked more closely at PCL, which has profits and
does not need to remedy losses, as wood volume rebounds are gradual with the
lean average square footage of townhouses or apartments well under ˝ of the
large suburban homes popular years ago. Many of the stocks we follow trade
under NPV, and we concluded that ABX, AEM, UFS, IP, PKG, BHP, RIO, VALE,
AAUKY, XSRAF, TCK, FCX, ANTO, HBM, MLKKF, DULMF, TC, AWC or CENX represent
better values. We remain at Neutral on PCL as a nice “bunt single” with some
upsides, but the cyclicals that sold down severely in the second-half 2011
fears of the European crisis appear to have greater near-term upsides.
We already have one recommendation that benefits from a future housing rebound. We had initiated coverage of Norbord on March 18, 2011 with an Overweight rating at US $14.92, yes it is very painful down at $9.51 down about 35%, as Norbord is about $20 per 000 cu ft lower cost than LPX and avoided larger losses like WY or LPX. We continue to value PCL on an Enterprise value per acre basis. As housing markets recover specifically multi-family construction large land parcels will be needed to construct new homes on. As a result we have decided to increase our estimated value per ounce from $1,300 to $1,350. As a result we are increasing our price target from $42 to $44. However, give that PCL trades for $38.82 per share currently we have elected to remain neutral.
PCL’s peak share price near $53 in 2008 suggests prior historic stock market valuations had peaked at the equivalent of a $1,600 per acre valuation four years ago. While those valuations are possible, the damage to the residential mortgage finance system erodes land values in some markets. PCL’s Montana smaller acreage sales traditionally have been sold on a “cash basis” to people who sold multi-million dollar homes in California or Seattle. However, even those buyers bargain tough when the pool of qualified home buyers has fallen and credit standards risen to such a high level. We cannot build a price target argument in the $50 to $60 per share range based on record future land values with strong conviction, and quite frankly our $145 per share price target for Domtar based on its large free cash flows, share buybacks and valuation near eight times earnings appears more persuasive to us.
Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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