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.

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  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 >>

You May Also Like

Trading Center