Maybe, just maybe, there are finally some signs of life in the U.S. residential construction market. Companies like Illinois Tool Works (NYSE:ITW) have seen some inklings of recovery and investors are slowly getting more optimistic. Be that as it may, though, shares in Weyerhaeuser (NYSE:WY) have already jumped more than 25% in the past couple of months on this improving outlook and that has taken a lot of the undervaluation out of the stock.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

A Surprisingly Strong Fourth Quarter
Weyerhaeuser's fourth quarter results were actually pretty positive in a lot of respects. Total revenue did drop 3% from last year and about 2% from the prior quarter, but they nevertheless came in a little better than expected. Although the large wood products segment saw revenue fall 14% sequentially, cellulose fiber, real estate and timberlands were all up sequentially.

Margins are where Weyerhaeuser really surprised to the upside. Gross margin did slide about a point from last year, but reported operating income rose 24% from last year. Every unit of the company showed better-than-expected pre-tax earnings performance, with timberlands and real estate really jumping out this quarter. All in all, the company more than doubled the bottom-line earnings expectation of Wall Street. (For related reading, see Zooming In On Net Operating Income.)

Timber, with a Twist
Investors who want to invest in the timber space ought to roll up their sleeves and do some thorough due diligence on names like Plum Creek (NYSE:PCL), Potlatch (NYSE:PCH), Rayonier (NYSE:RYN) and Weyerhaeuser.

Of course it's boilerplate for financial writers to advise investors to do their own due diligence, but I really mean it here. The reason is that the operating models can be quite different. Both Plum Creek and Weyerhauser own or control over 6 million acres of timberlands in the U.S., but Weyerhaeuser's is worth more on the basis of where it's located.

Moreover, Plum Creek has traditionally put a lot of reliance on real estate sales for its cash flow and less so on manufactured products like lumber and plywood. Weyerhaeuser, though, gets substantially less revenue from timberland sales and substantially more from wood and pulp sales. That makes them much more like Louisiana-Pacific (NYSE:LPX) or Norbord, relatively speaking, and customers like Procter & Gamble (NYSE:PG) (which buys Weyerhaeuser's pulp for use in products like diapers) make up a bigger part of the business.

Is There Still Time for Timber?
Relative to full-cycle earnings power and underlying timber net asset value, Weyerhaeuser is still undervalued by more than 20%. That said, the company's exposure to wood sales does make it more vulnerable to another "false dawn" in construction and that 3% dividend yield is not exactly eye-popping. (For related reading, see The Power Of Dividend Growth.)

The Bottom Line
I can understand holding Plum Creek, Weyerhaeuser or Rayonier as both a play on a residential recovery and a long-term quality hard asset company. Timberland has shown its worth over many decades. Still, with the recent interest in this space, investors may want to weigh the risk of waiting a bit (to see enthusiasm cool) with the risk that the recovery is real and the stocks don't retrench again until after a respectable run from here.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center