Lumber prices could spark a 18% rally in Weyerhaeuser as wood valuation suggests limited downside, BofA says

• A rally in lumber prices could spark a 18% surge in shares of Weyerhaeuser, Bank of America said in a note on Tuesday.
• BofA upgraded Weyerhaeuser to a Buy rating, arguing that its valuation has little downside.
• The bank believes Weyerhaeuser could issue a special dividend of $2 per share in early 2022.
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Shares of Weyerhaeuser stand to rally 18% from Tuesday's close if lumber prices see a rebound going into year-end, Bank of America said in a note on Tuesday.

The bank upgraded shares of the timberlands owner and sawmill operator to Buy and reiterated its $41 price target, arguing that the company's current valuation offers limited downside potential to investors.

"The embedded price in WY's valuation is about $286/1,000 board feet, 18% below the $350/mbf we believe is fair on a normal basis," BofA explained. On top of the valuation discount, Weyerhaeuser could issue a special dividend of $2 per share by the first quarter of 2022, the note said.

Also helping offer upside potential in shares of Weyerhaeuser is a potential late summer rally in lumber prices, BofA said, offering 3 reasons why the commodity could surge after falling more than 70% from its May peak.

Encouraging to the bank is Weyerhaeuser's stock holding steady in recent months even as lumber futures plummeted after soaring to record highs. "WY has stopped going down on bad news... this suggests the worst of the near-term price declines is in the shares," BofA said.

Still, there are risks associated with Weyerhaeuser stock despite its discounted valuation relative to peers, the bank said. Those risks include weak employment, a deterioration in housing fundamentals, and adverse regulations on the tax status of REITs, among others.

"While WY has its risks and tends to act more as a classical cyclical (best bought early in the cycle), we believe valuations on normalized lumber pricing are attractive given the shares' relative 14% underperformance year-to-date," BofA concluded.