On the verge of a breakout higher?
After falling to a new 6-month low at 48.82 in August, the subsequent rebound back above the 50.00 psychological level succeeded in halting the selling pressure. Notably, the morning star rejection off the 49.10 support area on 23 August showed some early signs of a rebound. Further signs of a bullish trend
change can be seen by the breakout above the downtrend line later on 25 August (blue highlight).
Looking closer, a consolidation phase has taken over for the past five weeks with a slight bullish bias. Specifically, the recent rebound off the 200 day moving average on 12 October broke above the downtrend line with increasing volume signals a high likelihood of a continuation move higher (green highlight). Therefore, expect price to trend higher to test the 61.77 resistance area followed by 63.70. The near-term support at 51.10 – 51.95 should continue to keep price up if the weakness reappears.
Our US Research Partner reiterated the Strong Buy rating on PotlatchDeltic after a review of the record-shattering 2Q21 results reported in August, but with modest adjustments to our target price (to $75 from $79) and forward estimates due to the surprising 68% collapse in composite lumber prices since late May. Looking ahead though, we draw encouragement that 1) buying activity is finally stirring among retail home centers, while residential construction demand remains unsatiated, and 2) a rapidly increasing cost floor is forming for British Columbia lumber production capacity (which our Canadian colleagues estimate will reach $600/mbf by year-end). Accordingly, we remain comfortable that PCH’s Wood Products pricing will stabilize into a structurally higher than historical range, leading to outstanding cash flow yields an further special dividend payouts. To wit, management reiterated its confidence that its first special dividend would be declared in 4Q21 at a level “multiples” of the current base dividend, thanks to the extraordinary YTD cash flow already produced.