Building Product Reset: Caesarstone Upgraded, Plum Creek Timber Downgraded At BofA

• Caesarstone Sdot-Yam Ltd CSTE shares are down 45 percent year-to-date, while shares of Plum Creek Timber Co. Inc. PCL are down 5 percent over the same period.
• BofA Merrill Lynch’s George L. Staphos upgraded the rating on Caesarstone from Neutral to Buy, while downgrading Plum Creek Timber from Neutral to Underperform.
• With plywood imports weighing on US pricing, producers are cutting back production to boost prices, Staphos said.

Analyst George Staphos mentioned that plywood imports have continued to weigh on US pricing as domestic demand growth has remained sluggish. The OSB price forecast for 4Q has been raised to reflect the current market trends. While operating rates have remained low, producers are cutting back production to boost prices.

Plum Creek Downgrade Not Based On 3Q Performance

The downgrade in rating on Plum Creek is not based on the company’s fundamental performance in 3Q, rather on “our calculated total shareholder return (TSR) and ratings distribution in paper & packaging,” Staphos stated.

Although the company’s capital allocation efforts are appreciable, the recovery in timber prices is expected to be modest and lag the recovery in wood product prices, the analyst pointed out.

Caesarton Upgraded On Valuation

Caesarston’s shares have declined by 40 percent since the company’s reporting day and are currently trading at a discount to the building products peers. The company’s current stock valuation indicates a risk/reward that is “sufficiently positive to rate the shares buy,” Staphos wrote.

“CSTE clearly has many risks but valuation coupled with relatively negative investor sentiment heading into 3Q could lift the shares, in our view, particularly if fundamentals are reasonably in-line with our lowered forecasts,” the report added.

Caesarston’s share growth within quartz between 2012 and 2014 was driven by a shift to direct distribution in the US, the Supernatural launch, and the IKEA award. Staphos added that the US growth rates are likely to be lower-than-expected in view of increased capacity and rising competition.

Staphos believes that the “price differential between CSTE and its competitors is likely to remain relatively unchanged, as opposed to expanding, given its increased capacity and increased competition.”

“Despite investor concerns around US growth rates, we believe quartz is still in early innings of taking share in the countertop market and that should continue to drive mid-teens or higher sales growth for the short- and medium-term,” the report noted.