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Tickers in this Article: WY, IP, WMV, TIN, LFB, BAM
If you're in the forest products business these days, it isn't exactly the best of times.

Rising Costs and Record Low Product Prices
Lumber prices are down to fifteen year lows because of the slump in U.S. housing construction. Meanwhile, prices for newsprint have been dampened by internet growth, falling newspaper circulation and advertising sales, and the shrinking physical size of many newspapers.
Recent increases in the price of recycled fiber and a shortage of wood chips are now expected to squeeze margins even further.

As a result, most analysts covering the industry have been busy shaving their earnings estimates for this year, and, in some cases, cutting back on their profit recovery projections for 2008.

Analysts Still Positive on the Sector
Why are a lot of analysts still fairly positive on this sector? Are they simply "looking across the valley" of this year's earnings downturn in anticipation of a strong rebound next year, or is there something more to this optimism?

The short answer is that these guys are not looking across the valley, but into it, and inside that valley is some pretty nice timberland that could be worth a whole lot of cash.

Timberland Attractive to Outside Investors
Over the last decade, about 80% of the 31 million acres of timberland shed by producers like International Paper (NYSE:IP) and MeadWestvaco (NYSE:MWV) wound up in the hands of financial investors. This trend has been prompted by the producers' desire to offload non-cash flow producing assets in an effort to pay down high debt levels, and the ability of financial investors to take a longer term investment view on the land they acquire. Additionally, accounting rules allow them to value these assets a number of ways, thus smoothing periodic value changes, and those returns have outperformed the SP500 and are uncorrelated with other major asset classes like stocks, bonds and real estate.

Recently, the value of these forest land assets also attracted the interest of another class of investor -- the corporate raider. After taking a 7% stake in the company, Carl Icahn persuaded the management at Temple-Inland Inc (NYSE:TIN) to spin-off its financial services and real estate holdings and to sell almost its entire holding (1.8 million acres) of prime timberland in the U.S. South.

Land Values Have Soared
A flurry of valuation re-thinks for the sector have been prompted by the roughly 50% return realized by Icahn for this little bit of shareholder activism, and a recent acquisition of Longview Fibre Co. (NYSE:LFB) by Brookfield Asset management Inc. (NYSE:BAM) -- at the almost unheard of price $3,000 per acre for its forest lands. Using sum-of-the-parts analysis, analysts are coming up with some fairly lofty valuations for those companies that still hold sizable timberland assets.

Weyerhaeuser could be Undervalued Due to its Large Timberland Holdings
One target of such re-valuation thinking these days is Weyerhaeuser Company (NYSE:WY). The fact that the company holds almost as much land (5.7 million acres) as the state of Vermont has prompted some analysts to conclude that its sum-of-the-parts value would exceed $100 a share. Valuations up to $110 a share have also be postulated on the view that the company could enhance shareholder value if it converted into a timber REIT. (To learn more, check out What Are REITs? )

What makes these valuation possibilities even more plausible, is the presence of another activist shareholder in the form of Franklin Mutual Advisors LLC, who now holds over 7% of Weyerhaeuser's common shares. As was the case with Icahn and Temple-Inland, Franklin also has been pressing management to consider re-organization options which could include asset sales.


Of all the possible options, re-structuring to a REIT is viewed as the riskiest choice owing to the complex tax and organizational issues involved. However, now that the possibility of doing something to enhance shareholder value is on the table, it might just be enough to offer a degree of support for the shares as the earnings fundamentals face the prospect of further deterioration due to the weak housing market.

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