Weyerhaeuser: 5 Reasons Paper Will Beat Rock

The last few years have been really good to commodities in general, but metals and mining (therefore "rock") in particular. Mining blue chips such as VALE and Freeport McMoran (FCX) have been the envy of the market, as they've fed China's seemingly insatiable appetite for building & construction. In that same time frame, Weyerhauser (WY), a blue chip in "paper" has performed in line with the market, but languished in comparison with mining plays. One reason for this tepid past performance is that WY has been a victim of being viewed as a pure play on US Housing.

Two things are changing that make me take paper over rock going forward. First, the bullishness on China is turning to nervousness, reflected in a number of articles including this on Yuan Revaluation. Second, the market is beginning to consider the trough valuations for US housing, and the meaningful potential upside starting late 2012, early 2013. In that second category, WY provides a levered 'picks and shovels' play on US housing, while also providing a play on other construction (see below).

Here are 5 reasons to be optimistic about WY going forward :

• US Housing. The multi-year malaise in US Housing might be coming to an end, signaled both by new house starts as well as used home sales. Two recent positives are the surge in new home starts according S&P Housing Views, and the recent earning beat by KB Homes and the associated upbeat note by Goldman Sachs. WY, as a strong player in the high quality lumber business, is particularly levered to the housing market.
• Global exposure a net plus. While WY is growing its business globally like any other S&P company, 81% of WY's export revenue comes from Japan (see the UBS conference presentation on WY's Investor site). The tragic devastation of property in Japan is likely to lead to an equally significant reconstruction, and WY's significant presence and strong relationships in Japan should be provide strong upside in the months and years to come.
• Dividend Bubble. Given the record low rates in bonds and the non-zero potential of default on government bonds, we are seeing a movement toward dividend paying stocks that yield as much or more than bonds with the possibility of dividend growth. Some such as this SA contributor make the case that this might be the beginning of a 'dividend bubble.' This is a plausible argument, given investor hunger for yield and fear of the spastic algorithmic trading that has taken over the market. WY's current dividend of 3.5% is solid and conservative, with substantial upside (see Plum Creek Timber for a comparable) and a stated goal of being aggressive about dividend increases.
• Analyst upgrades. A number of analysts have recently turned positive on WY and the longer-term story for high quality timber. Two of note are Steven Chercover, a Starmine rated analyst who set a $22 target on WY, and more recently its inclusion in CNBC talk show host Jim Cramer's High Dividend Stock Picks.

(Click chart to expand)

• Technical Breakout?. WY has been in a base setting channel for the last few months between $16 and $18. As you can see from this chart, any breakout of that takes you to $22 (see the peak in July and August 2011). Coincidentally, that is the next target in the Steven Chercover's upgrade alluded to in the previous point.

Conclusion. Betting on housing is risky in the near term but a safe bet in the longer term, given that the US is going to have long-term population growth. The question is timing. While no one can predict the exact inflection point, I argue that you are more right than wrong if you pull the trigger now.

Disclosure: I am long WY.