BOSTON (TheStreet) -- Weyerhaeuser (WY) - Get Report manages 22 million acres of forests and has a real estate unit. It sells products ranging from pulp to single-family homes. Barclays ranks Weyerhaeuser, now structured as a REIT, as one if its best stock ideas for 2011.

REITs are required to pay out the majority of their income to shareholders, but the distributions do not qualify for dividend tax treatment. Still, these companies offer high-yielding shares. Weyerhaeuser's management just provided dividend guidance for 2011 and is expecting to pay out 60 cents for the fiscal year, equaling a yield of roughly 3.2%.

Although that figure trails the yields of mega-cap common stocks, including




(VZ) - Get Report



(PFE) - Get Report

, the payout has room to grow. Furthermore, value-oriented Barclays argues that the stock is extraordinarily cheap. Of its best stock picks for 2011, Weyerhaeuser has the second-most upside potential.



has the most.

Barclays says Weyerhaeuser is an ongoing restructuring story that will benefit from an upturn in real lumber pricing. The lumber market has been in a 16-year slump, according to the British bank, but an inflationary environment, which looks increasingly likely given the Fed's insistence on quantitative easing, will create a multi-year cyclical rise in demand and profits.

Barclays says this cycle began in 2010 and will accelerate in 2011. The thesis is valid. Weyerhaeuser suffered a loss of $8.71 a share in 2008, a loss of $2.58 in 2009 and is running a profit of 67 cents so far in 2010, with a predicted profit of 5 cents in the fourth quarter.

Barclays is the lone bull on Weyerhaeuser. It has the highest 12-month price target on the Street, at $29.

Deutsch Bank




Goldman Sachs

rate the stock either "hold" or "neutral," with targets of $20, $18 and $18, respectively. But Barclays has four catalysts, which it believes will boost Weyerhaeuser's stock by 53% in 2011.



- A cyclical rise in housing starts, which will support lumber prices and real estate.

- A 50% drop in British Columbia's log supplies due to a Pine Beetle infestation.

- A 50% decrease in Russian log exports as the country internalizes its supply.

- A Chinese demand increase as its economy grows and it's forced to rely less on Russia.

Those catalysts are politically sensitive, but if they come to fruition, Weyerhaeuser's fundamental outlook will improve materially. Given the market's conservative valuation, Barclays believes the stock offers an attractive margin of safety. Specifically, the bank speculates that liquidation of the timber assets alone is equivalent to $6 billion, or $19 a share. In other words, Weyerhaeuser's stock is selling below its intrinsic fair value. And there are already indicators validating Barclays' prediction of a turnaround in lumber pricing.

December prices of Douglas Firs jumped 4.4% sequentially and Whitewoods prices popped 5.5%. Pacific Northwest log prices are still exceptionally cheap and would need to more than double to reach peak levels tagged in the '90s, which Barclays believes were modest by historical standards. The price jumps and near-term outlook are dependent on Russia, which could reduce or eliminate a 25% duty on log exports to enter the World Trade Organization. This would significantly damage Barclays' investment thesis for Weyerhaeuser. But, Prime Minister Vladimir Putin is reiterating his stance to internalize the industry.

Russia is the world's largest log exporter by a factor of five-to-one over the U.S., the second-largest exporter. China is the world's largest importer, by a factor of three-to-one over next-biggest importer, Finland. Chinese demand is growing steadily. A potential supply shock, due to Russia internalization, coupled with the aforementioned Pine Beetle infestation in Canada, could present tailwinds to Weyerhaeuser's assets and pricing in various markets.

Barclays rates the U.S. paper and forest products industry "positive" and other timber stocks, including


(RYN) - Get Report


Plum Creek


, "overweight." However, it considers Weyerhaeuser the best investment in the group, given its 45% discount to timberland value. The discount compares favorably to that of Rayonier, at 35%, and that of Plum Creek, at 27%. But, Rayonier and Plum Creek offer higher distribution yields, at 4.1% and 4.5%, respectively.

Barclays speculates that management's distribution guidance, at 60 cents for 2011, is too conservative. Prior to the announcement, it predicted an annual payout of 75 cents. This forecast was predicated upon further restructuring of the company's wood products business, which is burning through cash. Restructuring is inevitable in Barclays' view and could result in $100 million of 2011 savings, supporting a distribution boost.

Although the guidance disappointed the bank, it was thrilled that management targeted a payout ratio of 75% of funds available for distribution. Barclays' log and wood prices are trending up faster than expected and Weyerhaeuser's pulp profits are beating the bank's expectations. Thus, it sees upside to the dividend. Weyerhaeuser's stock is down this year and tax-loss selling has occurred during December by investors looking to offset stock-market gains. Barclays believes Weyerhaeuser's stock could rally immediately in the New Year.

-- Written by Jake Lynch in Boston.


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