After A Decade Of Dismal Demand, Analyst Downgrades Weyerhaeuser

Shares of timber giant Weyerhauser Co (NYSE: WY) drifted lower by 4 percent over the past six months, but bulls may have even longer to wait for the stock to regain its positive momentum. On Sunday, BMO Capital Markets analyst Mark Wilde downgraded Weyerhauser from Outperform to Market Perform based on concerns about log prices.

According to Wilde, improving production coupled with a decade of slumping demand has created too many headwinds for Weyerhauser. While CEO Doyle Simon has made major business improvements at the company, including margin expansion on limited capital investment, even Simon won’t be able to fight a softening market, Wilde said.

“It could be years before southern log prices improve and the success of WY's Plum Creek merger hinges heavily on Southern timber performance,” he wrote. Southern sawlog prices are about 60 percent lower than they were as recently as 2005. In fact, southern sawlog prices recently endured seven consecutive quarters of price declines. Wilde pointed out that Weyerhauser has 7.4mm/acres tied directly to the southern U.S. market.

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While BMO is optimistic North American demand will shift southward over time, Wilde isn’t convinced prices will improve until inventory levels have been significantly reduced. At the end of the day, a recovery in the southern log market, as well as Weyerhauser’s share price, could be years in the making.

In the meantime, upside for the stock could be limited. BMO has a $36 price target for Weyerhauser. BMO values the company’s timberlands at roughly $38 per share and its Wood Products business at roughly $7.50 per share.