Sylvamo Deep Dive

Sylvamo Deep Dive

October 1, 2021

Summary:

At first glance, I thought Sylvamo was a business that I didn’t want to own at any price. I have learned that it usually doesn’t pay to invest in highly leveraged companies in secular decline. After further analysis, I think it could be attractive at the right price. I think the stock is worth ~$50/share. It’s trading in the when issued market well below that price, but I wouldn’t buy it. There will be heavy selling pressure (although it is being added to the S&P600 index). I think buying it at $25 or lower probably makes sense as it would imply ~100% upside to fair value. Management has signaled that the company will be in a position to return cash to shareholders in the second half of 2022. I imagine at least a portion of that capital return will be in the form of a dividend. This could potentially force the stock to re-rate. If this catalyst didn’t exist, I would be very hesitant to buy the stock even at a cheap valuation given my experience buying in highly leveraged companies in secular decline.