News
2007 Pricing Forecast, Target and Recommendation Changes

Continued weakness in U.S. housing markets has led us to lower our 2007 commodity pricing forecast for a number of building materials (lumber, OSB and plywood). We have also lowered our paper pricing …

Continued weakness in U.S. housing markets has led us to lower our 2007 commodity pricing forecast for a number of building materials (lumber, OSB and plywood). We have also lowered our paper pricing forecasts for 2007, as we expect that the slowing North American economy will reduce consumption. One commodity that has surprised us by its pricing strength is market pulp. As a result, we have raised our 2007 pricing forecast for both softwood and hardwood pulps. Similarly, stronger than expected containerboard pricing has led us to revise our linerboard and medium forecasts up for 2007. However, we continue to believe that some of the recent price increases will not ‘stick’ as the gains are not supported by the underlying fundamentals. We are particularly cautious on market pulp, uncoated freesheet and containerboard. We highlight our belief that a number of the Canadian-dollar-sensitive forest products names made significant gains since the end of November 2006, as weaker energy (oil and natural gas) prices seem to have taken some of the adrenaline out of the Canadian dollar. The cause of these share price appreciations has prompted us to question the underlying strength of these gains, as the outlook for many forest product commodities is weaker. We continue to believe that the Canadian dollar, while volatile, will not see a material drop in value in the forseeable future. Changes to our 2007 commodity pricing forecasts has led to changes in EPS/EBITDA forecasts for many of the companies under our coverage. In addition, these commodity pricing changes also led us to revise our 12-month target prices for these same companies, as our valuations are based on an 85% weighting to EBITDAtrend and a 15% weighting to EBITDA2007. We note that a number of these target prices changes also lead to revised recommendations. In this note, we present our revised 2007 pricing forecasts, and our resulting 2007 EPS changes and 12-month target prices.

The previous is an excerpt from Paper & Forest Products: Weekly Industry Digest. For more information, please visit www.salmanpartners.com