Nobody ever said that owning Weyerhaeuser (NYSE:WY) was going to be exciting, but that's the nature of owning a company focused on timberland and wood-derived products. This is a company where value can accrete slowly by virtue of the company's timber assets, sweetened by growing exports to Asia and an eventual recovery in the U.S. housing market.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
OK Results in a Tough Market
Weyerhaeuser's earnings weren't great, but then nobody expected them to be. Revenue fell 5%, with declines in pulp and and real estate mitigating growth in timberland and wood products. All in all, conditions in the wood products business seem to be getting modestly better, though from a pretty distressed base.
Overall profit performance was not as good. Gross margin fell almost four points, and although reported EBIT grew 15% from last year, "core" operating income was down more on the order of 30%. Moreover, EBTIDA dropped about 15% from last year and 36% from the prior quarter. Profitability was lower across the board, with timberland and pulp profits offering the largest deltas.
SEE: Understanding The Income Statement
The Recovery Won't Come Fast Enough
There's anecdotal evidence that the worst is behind the housing market, but there's no reason to believe that there's going to be a rapid recovery in building activity. That's a reality that applies across the timber industry, including Plum Creek (NYSE:PCL) and Rayonier (NYSE:RYN).
That doesn't necessarily mean that Weyerhaeuser is stuck, though. For starters, the company owns more Pacific Coast timberland than those other timber companies and that's an increasingly valuable asset base. Not only have British Columbia timberlands been severely damaged by insects, but it's a convenient source of timber for the Chinese market - a market that is not so strong today, but likely still has ample growth in the years ahead.
In the meantime, Weyerhaeuser and Louisiana-Pacific (NYSE:LPX) are seeing marginally better wood product markets. Some of this is due to inventory run-down and some is due to better cost containment. But there is finally some level of optimism that modest homebuilding growth could resume before long.
Stick and Stay, Make It Pay
Investors should not expect anything especially dynamic from Weyerhaeuser. Yes, Procter & Gamble (NYSE:PG) is a big customer of the pulp business (cellulose pulp goes into a variety of absorbent products like diapers), but Buckeye Technologies (NYSE:BKI) and Glatfelter (NYSE:GLT) are better plays on that theme. Likewise, there is a chance that wood pellet-based biomass plants will have a role in the renewable energy market someday, but that's not going to be the case in the next quarter or the next year.
Instead, investors have to be content to collect dividends and see the steady appreciation of the company's timber assets. Luckily, there's a pretty long track record here, and as an asset class timberlands rank pretty well in terms of long-term potential.
The Bottom Line
Plum Creek offers a better dividend, but I dare say that Weyerhaeuser offers a better business in terms of its pulp and wood products businesses as well as the location and composition of its timberlands. It's also worth mentioning that Plum Creek has historically relied much more heavily on land sales to the real estate market for its cash flow.
Valuing Weyerhaeuser on either a mid-cycle EBITDA or NAV basis clearly demands some assumptions about what the "new normal" is going to look like, and that introduces the risk of downside. Nevertheless, fair value on these shares looks to be in the mid-to-high $20s and that makes it a worthwhile stock to consider for patient investors who can buy it for its three-to-five-year potential.
SEE: 5 Must-Have Metrics For Value Investors
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
Stock AnalysisHere are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
InvestingThe further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
Fundamental AnalysisOptions market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
Stock AnalysisCan these two oil stocks buck the trend?
Investing NewsAlcoa plans to split into two companies. Is this a bullish catalyst for investors?
Stock AnalysisIf you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
Investing NewsA rate hike would certainly alter the investment scene, but would it be for the better or worse?
Investing NewsWith market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
Mutual Funds & ETFsInstead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
Investing BasicsDiversifying with international stocks can benefit most portfolios, but beware of country risk.
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
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 >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
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 >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>