Overview
Weyerhaeuser Company (NYSE: WY) began operations in 1900. It is an equity timber REIT and one of the world’s main private owners of timberland. As of February 2019, Weyerhaeuser was the 15th largest REIT in the FTSE Nareit All REITs Index with a market capitalization above $19 billion. Weyerhaeuser manages its timberlands on a sustainable basis, with an eye toward maximizing their long-term value. Its manufacturing operations span 35 facility locations throughout the United States and Canada. The Weyerhaeuser timber REIT unit prices are sensitive to changes in the price of lumber.
Recent Company Trends
The price of lumber tumbled in the fourth quarter of 2018. As a consequence, WY units collapsed in 2018 from a high around $39 to a low below $21. As of late February 2019, the units have recovered to about $26. However, only about half of the decline can be ascribed to any one factor.
Lumber prices had a good run from Fall 2015 to Summer 2018. At their peak, lumber futures were trading around $650 per contract. Current contract prices are hovering around $400. The period of strong lumber prices allowed Weyerhaeuser to create vertical integration synergies from their logging operations on their own timberlands and their wood product manufacturing. They were thus shielded from rising timber prices and could boost margins on their wood products.
The bull market in lumber stemmed from the roaring housing market. Housing starts and building permit were strong throughout the period. As home prices rose, so did the demand for lumber as builders went into overdrive. Homeowners were encouraged to make renovations thanks to low interest rates on home equity loans. The U.S. imposed a 20% tariff on Canadian softwood lumber, reinforcing a supply shortage. Eventually, the lumber market experienced a bubble as home prices reached all-time highs and interest rates rose. As mortgages got more expensive, housing starts began to tail off, and the price of lumber finally fell back down to earth.
The Weyerhaeuser timber REIT missed earnings estimates for Q3 2018. The company attributed the disappointing numbers to a drop in the net sales and gross margins for its wood products, which accounts for 70% of company sales. Adjusted EBITDA fell almost 21% for the quarter. Weyerhaeuser felt the pain of weak lumber prices. Q4 2018 was even worse. Currently, the Weyerhaeuser timber REIT is assimilating its losses and improving its efficiency, as it waits for lumber prices to recover.
Products
Weyerhaeuser owns and controls about 13 million acres in the United States. It also has long-term licenses to manage more than 14 million acres in Canada. While its main source of revenue stems from tree harvesting, it also profits from the selling of properties, the manufacture of wood products, oil and natural gas production, mineral extraction, construction aggregates, communication tower leases, wind power and transportation rights of way. Wood products sold by the Weyerhaeuser timber REIT include engineered wood products, softwood lumber, medium density fiberboard, structural panels, and other specialty products. These products are primarily supplied to the industrial, light commercial, residential, multi-family, and remodel/repair markets.
Financials
These ratios pertain to the full year 2018 unless otherwise noted:
| Current Ratio 2018Q4 | 0.83 |
| Financial Leverage 2018Q4 | 1.91 |
| Debt/Equity 2018Q4 | 0.59 |
| Gross Margin | 25.2% |
| Return on Assets | 4.24% |
| Return on Equity | 8.34% |
| Interest Coverage | 3.15 |
| Revenue Growth 2018Q4 | -10.26% |
| Operating Income Growth 2018Q4 | -49.72% |
| Earnings per Share Growth 2018Q4 | -133.33% |
| Earnings per Share | $0.99 |
| Dividend | $1.32 |
| Payout Ratio | 1.333% |
| Free Cash Flow | $685M |
| Free Cash Flow/Sales | 9.16% |
| Free Cash Flow/Net Income | 0.92% |
| FFO Growth YOY | -0.12% |
| FFO/Share | $0.96 |
| Net Income Growth | 28.52% |
As of February 25, 2019, Weyerhaeuser had the following statistics:
| Price/Unit | $25.82 |
| Price/Cash Flow | 17.8 |
| Price/Book | 2.2 |
| Price/Sales | 2.6 |
| Price/Earnings | 26.4 |
| Dividend Yield | 5.1% |
| Market Cap | $19.31B |
Outlook
Despite the fiasco in the second half of 2018, Weyerhaeuser’s long-term investors are beginning to see some green shoots. For one thing, the units lost enough value to become a good value. One has to assume that all the bad news is already baked in. Another promising sign is the healthy yield, above 6% at the end of 2018. That’s way above the average 3.7% over the past five years. The dividend looks solid and should continue to grow. If you want to reduce the average cost of an existing Weyerhaeuser position, 2019 looks like a good time to begin a program of dollar cost averaging. The growth rate will probably contract for the remainder of the year, and its hard to believe that we will avoid a recession over the next two years. Of course, recessions are the best time to buy equities.
Once we emerge from recession into the next expansion, Weyerhaeuser should be in position to experience a nice rebound. The company has shown it knows how to cut costs and control capital expenditures, which should contribute to healthier free cash flow. With unit prices up some 25% from their low, it’s not too early for long-term investors to dip a toe in the water and buy the units when they fall back to the $20-$22 range.
Timberland is land covered with forest that is managed for timber (trees). Timberland real estate investment trusts (REITs, which are like mutual funds centered on real estate) are mainly involved in the harvest of trees and sale of wood products. Timberland REITs own and manage a variety of timberland properties in the U.S., Canada, New Zealand and other locations. Timberland REITs are a specialized investment that large investors often use to add diversity to their holdings. Smaller investors turn to timberland REITs to profit from price movements in the lumber industry.