Wall Street analysts are always careful to boost a price target for a stock beaten down by the market in recent months, mainly measured as a 52-week period, which roughly covers the whole trading year. This is why investors should pay attention when analysts forecast a higher valuation for a stock when that company is trading below a certain level relative to its 52-week high.
Today, shares of Potlatch Deltic Co. (NASDAQ: PCH) commanded a higher valuation from these Wall Street analysts, which becomes an essential place for investors to start looking for opportunities, especially considering that the stock now trades below 70% of its 52-week high. The company deals in wood, and while that may not sound as exciting as semiconductors in the technology sector, it does pose a potential for over 50% upside.
After investors realize where Wall Street wants to see this stock go, they should dig a bit deeper into the underlying trends that could push it to this perceived valuation. Although it may sound like the ‘big picture,' these trends are actually really simple.
Potlatch Stock: The Low-Hanging Fruit Analysts Couldn't Ignore
Analysts may have considered other technical factors to decide where to push this stock, starting with the price action discount. Some of these factors relate to the company’s valuation, which investors can proxy through its current dividend yield.
Offering investors an annual payout of $1.8 a share, Potlatch stock shareholders can now lock in a yearly dividend yield of up to 4.8%. This rate beats inflation in the U.S. and is above any bullish expectations for GDP growth in the years to come.
Knowing this, those at the Vanguard Group (Potlatch’s largest shareholder) boosted their stake by 0.5%. While that may not sound like much, it increased the asset manager’s net investment to $551.8 million. That is undoubtedly good news, but this record is as of May 2024, so here’s something more recent.
Analysts at Bank of America saw fit to boost Potlatch’s price target to $57 a share from their previous $50 target, or a 14% increase in their forecast. This new target would show investors a path for Potlatch stock to rally by 52% from where it trades today.
The hype that intoxicated artificial intelligence investors today can’t match the upside that can be found in a more ‘boring’ space like wood manufacturing. NVIDIA Co. (NASDAQ: NVDA) analysts only see a 0.5% upside in their consensus $126.3 price target today, a shadow of what Potlatch offers today.
But how is the company going to reach these valuations? Analysts must have had a good reason to boost the stock, and here are a few.
Potlatch Stock Rally Powered by the Federal Reserve
Some gave up on the hopes of the Federal Reserve (the Fed) cutting interest rates this year and moving their expectations to 2025. However, the CME’s FedWatch tool now projects an over 60% probability of rate cuts as soon as September of this year instead.
Last week, the employment situation report (NFP) showed a slowdown in monthly and annual job creation, and both the ISM manufacturing and services PMI indexes showed their price readings beginning to slow down as well. This means a more open path to taming inflation, and 4.1% unemployment today definitely could get the Fed on its feet.
Now, if the Fed does lower interest rates by September, it means that mortgage rates will also come down, potentially sparking new demand for homes, which, of course, need lumber, and that’s where Potlatch comes into play.
Given that lumber prices are back to a more average level, compared to the spikes seen during 2020 through 2022, the ducks are in a row for homebuilders to start building homes at bigger margins due to this lower lumber price. That could be why Warren Buffett began buying homebuilder stocks in the fourth quarter of 2023.
That is also why analysts now forecast up to 50.9% earnings per share (EPS) growth for Potlatch stock in the next 12 months. But how does the rest of the market feel about it?
Markets Acknowledge Potlatch Stock's Potential Upside
Potlatch stock’s short interest collapsed by over 15% in the past month, showing that those with a bearish view are now retreating, maybe realizing that the bullish evidence is overwhelming their short views. More than that, bulls are willing to overpay for this stock today, and that’s good.
Compared to peers like Weyerhaeuser (NYSE: WY) and even West Fraser Timber Co. (NYSE: WFG), which trade at forward P/Es of 23.7x and 9.2x, respectively, Potlatch trades at a forward P/E of 45.3x today. That valuation calls for a premium of up to 400%.
As the saying goes, it must be expensive for a reason, and now investors know what that reason is.
