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As the U.S. housing market has been recovering from the 2008 - 2009 recessionary lows this has provided many investment opportunities. One company that is situated in an industry poised to capitalize on the U.S. housing recovery is Weyerhaeuser Company (NYSE:WY).

Weyerhaeuser Co. is a real estate investment trust, which grows, harvests, manufactures and sells timbers, softwood lumber, engineered lumber, structural panel, pulp among others. It also provides real estate development & constructions services.

In the section below, I will analyze the past four performances of the company. I will look at Weyerhaeuser's past profitability, debt and capital, and operating efficiency. Based on this information, we will look for strengths and weaknesses in the company's fundamentals. This should give us an understanding of how the company has fared over the past few years and will give us an idea of what to expect in the future.

All numbers sourced from Morningstar and the company website.

Profitability

Profitability is a class of financial metrics used to assess a business's ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets, and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2009 = $(545) million.
  • Net income 2010 = $1.281 billion
  • Net income 2011 = $331 million.
  • Net income 2012 = $385 million.

Over the past four years Weyerhaeuser's net profits have increased from $(545) million in 2010 to $385 million in 2012. The 2009 negative profits is an indicator of how the recession in the U.S. had an effect on the company's fundamentals.

  • Operating income 2010 = $(447) million.
  • Operating income 2010 = $468 million.
  • Operating income 2011 = $594 million.
  • Operating income 2012 = $735 million.

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past four years, the company's operating income has increased from $(447) million to $735 million.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net income 2009 = $(545) million.
    • Net income 2010 = $1.281 billion
    • Net income 2011 = $331 million.
    • Net income 2012 = $385 million.
  • Total asset growth

    • Total assets 2009 = $15.250 billion.
    • Total assets 2010 = $13.429 billion.
    • Total assets 2011 = $12.598 billion.
    • Total assets 2012 = $12.592 billion.
  • ROA - Return on assets

    • Return on assets 2009 = (3.57)%.
    • Return on assets 2010 = 9.53%
    • Return on assets 2011 = 2.63%.
    • Return on assets 2012 = 3.06%.

Over the past four years, Weyerhaeuser's ROA has increased from (3.57)% in 2009 to 3.06% in 2012. This indicates that the company is making more money on its assets than it did in 2009.

Quality Of Earnings

Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.

2009

  • Operating income 2009 = $(447) million.
  • Net income 2009 = $(545) million.

2010

  • Operating income 2010 = $468 million.
  • Net income 2010 = $1.272 billion.

2011

  • Operating income 2011 = $594 million.
  • Net income 2011 = $331 million.

2012

  • Operating income 2012 = $735 million.
  • Net income 2012 = $385 million.

Over the past four years, the operating income has been higher than the net income in all years except 1. In 2010 the company's net income was higher than its operating income.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total assets

    • Total assets 2009 = $15.250 billion.
    • Total assets 2010 = $13.429 billion.
    • Total assets 2011 = $12.598 billion.
    • Total assets 2012 = $12.592 billion.
    • Equals and decrease of $2.658 billion
  • Total liabilities

    • Total liabilities 2009 = $11.206 billion.
    • Total liabilities 2010 = $8.817 billion.
    • Total liabilities 2011 = $8.335 billion.
    • Total liabilities 2012 = $8.522 billion.
    • Equals and decrease of $2.684 billion

Over the past four years, Weyerhaeuser has sold off more total assets than total liabilities. This indicates that the company has not been financing its assets through debt. Over the past four years, the company's total assets decreased by $2.658 billion, while the total liabilities have decreased by $2.684 billion.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets

    • Current assets 2009 = $3.706 billion.
    • Current assets 2010 = $2.641 billion.
    • Current assets 2011 = $2.065 billion.
    • Current assets 2012 = $2.135 billion.
  • Current liabilities

    • Current liabilities 2009 = $955 million.
    • Current liabilities 2010 = $1.074 billion
    • Current liabilities 2011 = $941 million.
    • Current liabilities 2012 = $1.230 billion.
  • Current ratio 2009 = 3.88.
  • Current ratio 2010 = 2.46
  • Current ratio 2011 = 2.19.
  • Current ratio 2012 = 1.74.

Over the past four years, Weyerhaeuser's current ratio has decreased from 3.88 in 2009 to 1.74 in 2012. The number has declined over the past four years but as the ratio is above 1, this indicates that the company would be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2009 shares outstanding = 539.17 million.
  • 2010 shares outstanding = 535.98 million.
  • 2011 shares outstanding = 542.39 million.
  • 2012 shares outstanding = 542.39 million.

Over the past four years, the number of company shares has slightly increased. The amount of common shares has increased from 539.17 million in 2009 to 542.39 million in 2012. This signifies a 0.59% increase over the past 4 years.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2009 = $835 million / $5.528 billion = 15.10%.
  • Gross margin 2010 = $1.160 billion / $6.552 billion = 17.70%.
  • Gross margin 2011 = $1.096 billion / $6.216 billion = 17.63%.
  • Gross margin 2012 = $1.249 billion / $7.059 billion = 17.69%.

Over the past four years, Weyerhaeuser's gross margin has increased. The ratio has increased from 15.10% in 2009 to 17.69% in 2012. As the margin has increased, this indicates that Weyerhaeuser has been more efficient.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2009 = $5.528 billion.
    • Revenue 2010 = $6.552 billion.
    • Revenue 2011 = $6.216 billion.
    • Revenue 2012 = $7.059 billion.
    • Equals an increase of 27.70%.
  • Total Asset growth

    • Total assets 2009 = $15.250 billion.
    • Total assets 2010 = $13.429 billion
    • Total assets 2011 = $12.598 billion.
    • Total assets 2012 = $12.592 billion.
    • Equals and decrease of 17.42%.

As the revenue growth has increased by 27.70% while the assets have decreased by 17.42%, this indicates that the company has been generating more money with less assets, effectively becoming more efficient.

Based on the fundamentals above, Weyerhaeuser is showing very good results. Over the past four years, the company is showing strength in all areas except for the current ratio. As the current ratio is still well above 1 the decline does not raise any "red flags". As the rest of the analysis indicates strength this is a good signal. Based on the above criteria, Weyerhaeuser is showing that it is a strong company that has been profiting on an increased need for timber and building materials.

Looking Forward

There are many reasons to believe that the U.S. housing market increase will continue. Some of these reasons are improving consumer confidence, low interest rates and affordable prices. Also adding to the recovery is the supply of available homes for sale remains relatively low. These factors have contributed to the average price of homes rising nearly 10 percent in January 2013, compared with 12 months earlier. According to an article posted by Time Magazine this is "the biggest increase in nearly seven years."

In a recent article issued by the financial post Samantha McLemore of Legg Mason Capital Management Opportunity Trust states: "We still think we are in the early innings of a prolonged recovery in housing and the economy." This sentiment is reiterated by JP Morgan Trust (NYSE:JPM) as they predict "U.S. home price gaining 7% in 2013 and predicts more than 14% increase through 2015". Bank of America (NYSE:BAC) increased their estimates for housing in 2013 by stating "values will jump 8% this year" which is up from a prior estimate of 4.7%.

The increasing trend in housing will create a need for Weyerhaeuser's products.

Analysts' Estimates

Analysts at MSN Money are estimating a strong year for 2013 and the growth to continue in 2014. EPS estimates for FY 2013 are $1.03 while growth is expected to continue into 2014 as EPS estimates increase to $1.30. Bloomberg Businessweek supports this idea as they expect the company's revenues to be around $8.0 billion for FY 2013 and increase to $8.7 billion for FY 2014.

Price Targets

  • Finviz has a price target for Weyerhaeuser at $30.73.
  • Recently, Argus gave the company a "Buy" rating. They increased their target to $36.00.

Over the past couple of years, the average P/E ratio for Weyerhaeuser has been 33.45. As the company has averaged a P/E of 33.45 and is expected to have an EPS in 2014 of approximately $1.30, this would give the stock a price target of around $43.48.

As the U.S housing recovery continues to progress, companies in the lumber industry will benefit. As the need for new buildings and people spending money on upgrading and repairing their current homes increases, Weyerhaeuser is positioned well to capitalize on this trend. Currently, analysts have a $36.00 price target on the stock. If the American housing trend continues this will prove to be a positive catalyst for Weyerhaeuser.

Source: Weyerhaeuser: Profiting From A U.S. Housing Recovery