Professional Documents
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Peter Ruschmeier
Industry Overview
1.212.526.9898
PNW Log Prices Up for 13th Month peter.ruschmeier@barcap.com
BCI, New York
Sector View:
New: 1-Positive
Old: 1-Positive
Investment Conclusion
Combining positive momentum for domestic log prices in the Pacific Northwest with historically large public market discounts to private
market values, we continue to favor timber-rich equities such as WY, RYN, and PCL. The Pacific Northwest is especially important to
Weyerhaeuser (1-OW / Positive), home to ~1/3 of their timberland acreage, but nearly 60% of their merchantable volume of timber
inventory. Rayonier (1-OW / Positive) and Plum Creek (1-OW / Positive) also have modest exposure to the region. Among wood product
producers, we believe shares of Louisiana-Pacific (1-OW / Positive) are a timely buy as oriented strandboard (OSB) prices are starting to
stabilize after a significant correction (~35%) over the past six weeks. If/when OSB prices trough and begin to rise again (as we believe
they will in the coming weeks), we believe shares of LPX will also respond favorably.
Summary
RISI released the June issue of "Log Lines," which tracks prices for Douglas Fir and Whitewood logs in the Pacific Northwest.
Douglas Fir log prices rose for 13th consecutive month, up 1.3% sequentially in June. Prices are now up almost 54% from the trough in
May 2009.
Prices for Whitewoods rose for 12th consecutive month, up 8.3% sequentially in June. Prices are now up approximately 68% from the
trough in June 2009.
This morning (6/17/10) trade publisher RISI published their June issue of "Log Lines" which tracks prices for Douglas Fir logs, and prices for
"Whitewoods" (primarily Hemlock) in the Pacific Northwest. Overall, Douglas log prices rose for the 13th consecutive month, up 1.3%
sequentially in June. Douglas Fir prices are up almost 54% from the trough in May 2009. Prices for Whitewoods rose for the 12th
consecutive month, up 8.3% in June vs. May. Prices for whitewoods are up approximately 68% from the trough in June 2009. Despite the
recent strength in log prices, the level of prices is still modest relative to its trading range over the past few years. Against a backdrop of a
recent ~20% decline in lumber prices over the past six weeks, we believe the upward momentum in log prices is likely to stall at some point
in the next few months. However, we remain in the camp that the trough in wood product and log demand/prices is firmly behind us.
Notwithstanding considerable volatility of wood product prices in recent months, we continue to believe the trend for demand/prices of logs
and wood products remains positive.
Combining this positive momentum for domestic log prices in the Pacific Northwest with historically large public market discounts to private
market values, we continue to favor timber-rich equities such as WY, RYN, and PCL. The Pacific Northwest is especially important to
Weyerhaeuser (1-OW / Positive), home to ~1/3 of their timberland acreage, but nearly 60% of their merchantable volume of timber
inventory. Rayonier (1-OW / Positive) and Plum Creek (1-OW / Positive) also have modest exposure to the region.
Among wood product producers, we believe shares of Louisiana-Pacific (1-OW / Positive) are a timely buy as oriented strandboard (OSB)
prices are starting to stabilize after a significant correction (~35%) over the past six weeks. If/when OSB prices trough and begin to rise
again (as we believe they will in the coming weeks), we believe shares of LPX will also respond favorably.
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Figure 1
$800
$4.88
$750
$700 $4.38
$650
$3.88
$/ MBF Scribner
$600
$/ cu ft
$550 $3.38
$500
$450 $2.88
$400
$2.38
$350
$300 $1.88
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: RISI Log Lines, Barclays Capital Estimates
Figure 2
70%
50%
10% TIN
SPP IP
-10%
-30%
Price Target Upside/Downside Potential Dividend Yield
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Figure 3
$ in millions, except per share figures
Discounted Cash Flow Summary
Less: Net Debt 7206 (109) 1434 2427 609 2429 735 3514 18246
Less: Underfunded Pension (B) 2706 58 (806) 34 93 250 291 600 3226
Less: OPEB Liability (B) 491 0 107 0 21 175 116 591 1501
Plus: Tax Deductibility of Pension Contributions 895 22 (285) 2 14 67 98 148 960
Less: Other Debt Adjustments (C) 327 0 0 (783) (118) 294 82 (300) -498
Adjusted Net Debt 9835 (73) 1020 1676 591 2723 1126 4257 21157
Plus: Sales/Acquisitions (D) 0 0 0 0 0 0 0 0 0
Plus: Other "Non-Debt" Valuation Adj. (E) 0 0 325 0 0 65 90 0 480
Equals: Equity Value 9861 1969 5043 7177 4278 2064 2621 14795 47807
Shares Outstanding 428.8 140.6 173.9 163.1 80.7 515.5 109.2 211.4
12-Month Target $23.00 $14.00 $29.00 $44.00 $53.00 $4.00 $24.00 $70.00 $47,807
Share Price $25.66 $7.96 $24.20 $37.18 $46.70 $4.04 $22.96 $39.95 $39,197
Upside Potential -10% 76% 20% 18% 13% -1% 5% 75%
Dividend $0.50 $0.00 $0.92 $1.68 $2.00 $0.00 $0.44 $0.20 $5.74
Dividend Yield 1.9% 0.0% 3.8% 4.5% 4.3% 0.0% 1.9% 0.5% 2.7%
(A) Calculated from DCF analysis.
(B) For SPP, Underfunded Pension and OPEB Liability are included in Net Debt.
(C) Other Debt Adjustments include:
$327 MM for IP's off-balance sheet debt; $294 MM for SPP for the company's off-balance sheet data, $78 MM for TIN's off balance sheet guarantees
and a $300 MM benefit for WY reflecting land sale proceeds from the real estate segment.
(D) Other Valuation Adjustments are $783 MM for PCL reflecting a timberland JV with the Campbell Group to which PCL
contributed 454k acres of southern timberlands.
(E) Other Valuation Adjustments are $320 MM for MWV which reflects an valuation improvement related to future timberland sales above timber values,
$65 MM fo SPP's estimate value of interest in a Chinese coated paper JV, $90 MM for PV of TIN's AMT tax benefit.
Source: Company Reports, FactSet, and Barclays Capital Estimates
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Figure 4
Capitalization
Shareholder Net Minority Capitaliz- Net Debt/ Market Enterprise Underfunded OPEB Other Adjusted
Companies Equity Debt (E) Interest ation (D) Capital (E) Cap Value (F) Pension Liability Adjustments Net Debt (G)
Intl. Paper (J) 5,819 7,206 232 13,257 54% 11,003 18,209 2,706 491 (568) 9,835
Louisiana-Pacific 1,234 (109) 0 1,125 -10% 1,119 1,011 58 0 (22) (73)
MeadWestvaco (J) 3,326 1,434 17 4,777 30% 4,208 5,642 (806) 107 285 1,020
Plum Creek 1,486 2,427 0 3,913 62% 6,064 8,491 34 0 (785) 1,676
Rayonier 1,175 609 0 1,784 34% 3,769 4,378 93 21 (132) 591
Sappi (J,K) 1,683 2,429 0 4,112 59% 2,083 4,512 250 175 294 2,723
Temple-Inland (J) 791 735 91 1,617 45% 2,507 3,242 291 116 (16) 1,126
Weyerhaeuser (J,L) 4,046 3,514 11 7,571 46% 8,444 11,958 600 591 (448) 4,257
TOTAL $19,560 $18,246 $351 $38,156 48% $39,197 $57,443 $3,226 $1,501 ($1,391) $21,157
Adjusted EBITDA (H) Adjusted Adjusted Enterprise Value / Adjusted EBITDA (H) , ( I )
Companies 2009A 2010E 2011E 2012E Mid-Cycle EV (I) 2009A 2010E 2011E 2012E Mid-Cycle
International Paper 3,016 3,199 3,174 3,036 2,753 20,838 6.9x 6.5x 6.6x 6.9x 7.6x
Louisiana-Pacific -33 266 414 474 465 1,047 -31.6x 3.9x 2.5x 2.2x 2.3x
MeadWestvaco 772 834 954 1,011 807 5,229 6.8x 6.3x 5.5x 5.2x 6.5x
Plum Creek 441 473 505 597 562 7,740 17.6x 16.4x 15.3x 13.0x 13.8x
Rayonier 372 415 438 468 451 4,361 11.7x 10.5x 10.0x 9.3x 9.7x
Sappi (M) 611 804 1,150 1,339 1,200 4,806 7.9x 6.0x 4.2x 3.6x 4.0x
Temple-Inland 463 480 571 622 572 3,633 7.8x 7.6x 6.4x 5.8x 6.3x
Weyerhaeuser 90 1,249 1,822 2,154 2,033 12,701 141.1x 10.2x 7.0x 5.9x 6.2x
TOTAL 5,732 7,720 9,029 9,702 8,843 60,354 10.5x 7.8x 6.7x 6.2x 6.8x
Footnotes:
A) Reflects fully diluted shares outstanding from most recent financial filing. J) Refer to following page for description of other adjustments all companies.
B) From 2007 Annual Reports and Company Press Releases K) SPP: Underfunded Pension and OPEB Liability are included in Net Debt.
C) Employee ownership estimated for ABH. L) WY net debt includes debt and cash from WY real estate business (WRECO).
D) Capitalization is defined as : Net Debt + Shareholder Equity + Minority Interest. M) SPP reflects calendar year results. SPP Adjusted EBITDA excludes non-cash timberland revaluation.
E) Net Debt defined as: LTD + Current Portion of LTD + STD + Preferred Equity - Cash. Note: See DCF summary on last page of this comp table for explanations of all net debt adjustments.
F) Enterprise Value is composed of Net Debt, Market Capitalization, Preferred Stock.
G) Adjusted Net Debt is defined as: Net Debt+Underfunded Pension+OPEB Liability+
Other Adjustments. See next page for Other Adjustments calculation.
H) Adjusted EBITDA is defined as: reported EBITDA, plus non-cash pension expense,
plus OPEB expense.
I) Adjusted EV is defined as: Market Capitalization + Adjusted Net Debt.
Source: Company Reports and Barclays Capital Estimates
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Equity Research
Figure 5
A) Net Debt defined as: LTD + Current Portion of LTD + STD + F) SPP: Underfunded Pension and OPEB Liability are included in Net Debt.
Preferred Equity - Cash G) Adjustments reflect off b/s financing of $294 MM for a sale/leaseback.
B) Adjusted Net Debt defined as: Net Debt+Underfunded Pension H) SSCC other adj. reflect $391 MM for off-balance sheet financing.
+OPEB Liability + Total Other Adjustments. I) TIN other adj. reflect $78 MM for off balance sheet guarantees.
C) ABH net debt includes a $693 MM add back from mark to market debt reduction. J) See next page for other valuation adjustments for WY.
D) IP other adj. reflect estimated $327 MM of off balance sheet debt related to QSPE's K) WY net debt includes debt and cash from WY real estate business (WRECO).
E) $296 MM valuation improvement related to future timberland sales not included L) SPP reflects calendar year results.
as a net debt adjustment.
Source: Company Reports and Barclays Capital Estimates Note: See DCF summary on next page for explanations of all net debt adjustments.
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Equity Research
Analyst Certification:
I, Peter Ruschmeier, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all
of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly
related to the specific recommendations or views expressed in this research report.
On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investment
management businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.
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Equity Research
Important Disclosures:
Louisiana-Pacific Corp. (LPX) US$ 7.96 (16-Jun-2010) 1-Overweight / 1-Positive
Rating and Price Target Chart:
LOUISIANA-PACIFIC CORP.
As of 14-Jun-2010
Currency = USD
28.00
26.00
24.00
22.00
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
6-07 9-07 12-07 3-08 6-08 9-08 12-08 3-09 6-09 9-09 12-09 3-10 6-10
Closing Price Price Target
Recommendation Change Drop Coverage
Source: FactSet
Currency=US$
Date Closing Price Rating Price Target Date Closing Price Rating Price Target
22-Jan-10 7.46 9.00 07-May-08 11.41 16.00
20-Oct-09 6.70 8.00 18-Apr-08 11.17 15.00
22-Sep-09 7.50 7.00 06-Feb-08 12.92 18.00
05-Aug-09 5.88 7.50 23-Jan-08 13.79 19.00
03-Mar-09 1.26 6.75 30-Oct-07 17.03 23.00
26-Jan-09 2.01 8.00 16-Oct-07 17.08 25.00
05-Nov-08 3.46 11.00 26-Jul-07 18.26 26.00
21-Oct-08 3.97 12.00 16-Jul-07 19.24 25.00
04-Sep-08 10.36 14.00
18-Jul-08 9.04 13.00
FOR EXPLANATIONS OF RATINGS REFER TO THE STOCK RATING KEYS LOCATED ON THE PAGE FOLLOWING THE LAST PRICE CHART.
Barclays Bank PLC and/or an affiliate trades regularly in the shares of Louisiana-Pacific Corp..
Risks Which May Impede the Achievement of the Price Target: Operating risk to oriented strandboard, engineered wood, and
composite wood markets. Extreme volatility of oriented strandboard pricing; sensitivity to interest rates, housing starts, and the home repair
and remodeling market.
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104.00
96.00
88.00
80.00
72.00
64.00
56.00
48.00
40.00
32.00
24.00
16.00
6-07 9-07 12-07 3-08 6-08 9-08 12-08 3-09 6-09 9-09 12-09 3-10 6-10
Closing Price Price Target
Recommendation Change Drop Coverage
Source: FactSet
Currency=US$
Date Closing Price Rating Price Target Date Closing Price Rating Price Target
16-Dec-09 43.99 70.00 21-Oct-08 40.86 81.00
20-Oct-09 40.66 55.00 18-Apr-08 64.21 90.00
14-Aug-09 35.96 51.00 11-Feb-08 63.88 104.00
03-Aug-09 36.52 53.00 23-Jan-08 65.12 101.00
09-Feb-09 28.67 51.00 16-Oct-07 70.64 105.00
26-Jan-09 28.06 56.00
03-Nov-08 36.90 82.00
FOR EXPLANATIONS OF RATINGS REFER TO THE STOCK RATING KEYS LOCATED ON THE PAGE FOLLOWING THE LAST PRICE CHART.
Barclays Bank PLC and/or an affiliate is a market-maker and/or liquidity provider in securities issued by Weyerhaeuser Co. or one of its
affiliates.
Barclays Bank PLC and/or an affiliate trades regularly in the shares of Weyerhaeuser Co..
Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from Weyerhaeuser Co. within the past
12 months.
Weyerhaeuser Co. is or during the last 12 months has been a non-investment banking client (securities related services) of Barclays Bank
PLC and/or an affiliate.
Risks Which May Impede the Achievement of the Price Target: Market risks include exposure to timber, lumber, plywood, OSB, and
pulp markets; availability and cost of raw materials including wastepaper, and sawtimber; changes in energy costs; and interest rate
sensitivity. Legal risks are related to alder log antitrust lawsuits.
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Equity Research
Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative
analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types
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Guide to the Barclays Capital Fundamental Equity Research Rating System:
Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see
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Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
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Equity Research
Distribution of Ratings:
Barclays Capital Equity Research has 1483 companies under coverage.
43% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 50%
of companies with this rating are investment banking clients of the Firm.
43% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating;
43% of companies with this rating are investment banking clients of the Firm.
11% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 36%
of companies with this rating are investment banking clients of the Firm.
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Barclays Capital Canada Inc. (BCC, Toronto)
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