Weyerhaeuser's Honesty Good For Investors (WY)

By Mark Whistler | February 08, 2008 AAA

The U.S. economy is undoubtedly in trouble, and this is affecting almost every sector within the market. Even core materials like lumber and packaging are suffering. Case in point, lumber producer Weyerhaeuser (NYSE:WY) reported a net loss for its fourth quarter of $63 million (30 cents per share) on February 8. This is a mammoth disappointment over the profit of $507 million ($2.12 per share) reported in the same quarter last year.

Investors were obviously disappointed, as seen in the nearly 4% decline in the share price on the day of the earnings announcement. Wall Street is now left wondering if Weyerhauser can stave off lackluster demand for its products and, dare I say, return to profitability?

Those Numbers are Ugly!
The company's fourth quarter numbers proved to be nothing less than dismal. In total, Weyerhaeuser has six divisions: Timberlands, Wood Products, Cellulose Fibers, Fine Paper, Containerboard Packaging and Recycling, and Real Estate. With the exception of Cellulose Fibers and Containerboard Packaging and Recycling, the other four divisions experienced decelerated earnings in the fourth quarter over the previous year. During the fourth quarter, Weyerhaeuser's Real Estate segment's earnings declined 93% year-over-year! The good news is the division did post a $22 million profit during the quarter, the bad news is executives have said the segment could easily go red in the first quarter of 2008. (To learn more, see The Importance Of Segment Data.)

Cards On The TableThe company issued a 2008 outlook for each division, something that is fairly bold, especially in this market. And, in every one of the individual outlooks, the tone is very clear: Expect a rough road ahead and lower earnings in the first quarter. This honesty is exactly why Weyerhaeuser is a standout! The company is good at what it does, and given the whopping "smack-down" in the housing market right now, and overall economy for that matter, it has actually weathered the storm very well. Many homebuilders are taking hundred million-dollar-plus charges to write down inventory!The management at Weyerhaeuser is absolutely rock solid, and in the quarter's earnings report, management told it like it is. Many companies on Wall Street try to sugarcoat bad news, however, Weyerhaeuser laid it all on the table, which demands market respect. Quiet Strength Better than Empty PromisesIt's important to note that even with the economy devastating the company's fourth quarter 2007 and probably first quarter 2008 earnings, the stock is still fundamentally healthy. The simple fact is, even with the market downturn, the company's annual sales will still likely top $15 billion for the year. The stock could suffer over the next quarter, or two, as housing markets continue to implode; however, Weyerhaeuser has management that is not hiding from present economic issues. At the end of the day, the company has decided to make its problems abundantly clear and is making no attempt to over-promise for the first quarter, or 2008. The Bottom LineI think honesty is the best way to approach the difficult conditions at hand. After all, when Wall Street is fully aware of a company's hardships, it opens the door for extremely positive news in future quarters when business turns around. Under-promise, over-deliver: this is a strategy patient investors may profit from in the final quarters of 2008 and in 2009.

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