Weyerhaeuser (NYSE:WY) grows and harvest trees, builds homes, an makes a range of forestry products. The company recently announced its full year results for 2013.The timberland segment has been the best performing segment as far as the earnings contributions are concerned followed by the cellulose fiber segment. The improvements are mainly driven by the increased demand for Western logs by the construction markets of China.
Although the results were satisfactory the company's ability to keep posting good results will be the key determining factor. Let's discuss the recent segment-wise performance of the company and make projections going forward.
The company's timberlands business segment manages 6.6 million acres of private commercial forestland worldwide. The company grows and harvests trees for use as lumber, other woods and other building products and pulp and paper. During 2013, the segment contributed around $470 million to the earnings that represents an increase of $148 million from the 2012's earnings contribution of $322 million.
Going forward, I believe that the timberland segment will continue to contribute higher earnings as the increasing demand in China and Japan will be reflected in the improved Western log price realization and higher volumes. In addition, after excluding the impact of disposition of non-strategic timberlands, I believe that the earnings of the first quarter of 2014 will be significantly higher.
The wood products segment provides a wide range of products that include softwood lumber, engineered lumber, structural panels and related products to the residential structural frame market. During the fourth quarter of 2013, the segment failed to report higher earnings due to lower sales across all product lines. It reported pre-tax earnings of $58 million that were lower than the previous quarter's $79 million.
The EBITDA contributed by each business can be seen in the chart above. Going forward, I believe that the company will be able to restore the sales trend as it expects a higher average realized price for lumber products as well as slightly lower average price realizations for OSB and engineering wood products.
The segment produces absorbent fluff used in products such as diapers. It also manufactures liquid packaging boards used primarily for the production of containers for liquid products. During the fourth quarter of 2013 the company derived $65 million in earnings from this segment reflecting an increase of $18 million from the previous quarter of the same year.
The chart above demonstrates the sales volumes and average price realization of both pulp and liquid packaging. Going forward, the company expects lower pulp volumes that are expected to be offset by higher realized prices and volumes of liquid packaging board. Therefore, in the short term the company might see lower earnings but for the long term the fundamental remains intact.
This segment (Weyerhaeuser Real Estate Company - WRECO) focuses on constructing single family housing and developing residential lots. During the fourth quarter of 2013 the net sales of the company increased by $164 million to $488 million but the top line growth was not reflected on the bottom line as it was hit by non cash impairment charges of $349 million. However, before making an adjustment for special items the earnings contributed by the segment were $71 million and reflects an increase of $38 million from the previous quarter's $33 million.
Going forward, I believe that the growth from the segment will continue to be driven by higher average closing prices coupled with lower selling expenses.
Stock Price Catalyst
The possible combination of WRECO with TRI Pointe Homes (NYSE:TPH) that was announced during June 2012 can be a possible stock price catalyst. There are a number of steps to complete the transaction that includes regulatory approvals. The transaction is expected to close by the end of the second quarter of the current year.
The stocks will be distributed to the company's shareholders in the form of either a spin off or split off transaction. However, both methods will bring significant value to shareholders.
The higher demand and prices for US timber and wood products are deeply correlated with the rebound in the US housing sector. The company expects significantly higher earnings from single family home building and the cellulose fibers segment in the coming quarters. Therefore, for the disciplined growth the company is putting efforts into shifting its assets portfolio towards the timberlands segment as can be seen in below chart.
In addition the company has completed the financing of the Longview Timber acquisition and also repaid its third-party WRECO debt. Therefore the company is left with total debt of under $5 billion with no maturities for the next three years.
Currently, the company is offering a dividend yield of 2.91 percent reflecting a payout of 85 percent. Going forward, with the company expecting to close the WRECO deal I believe that the company is an attractive investment.