This article is a little bit more high level than I usually write but Weyerhaeuser (NYSE:WY) has been and will be inordinately impacted by macro conditions and the company has changed so much recently that a higher-level view is helpful.
WY is a timberland REIT that also has lumber, oriented stranded board (osb), engineered woods and pulp businesses. On February 19, the company completed the acquisition of Plum Creek Timber, making WY the largest publicly traded timber REIT by far with 13.2 million acres of owned timberlands primarily in the United States. It pays a 4% dividend and is investment grade rated by both ratings agencies.
The lumber industry had a number of headwinds last year:
- Pine beetle infestation in Canada spurred Canadian lumber companies to harvest as many trees as possible before they were damaged, depressing prices for logs and lumber.
- The Softwood Lumber Agreement expired ending any regulation of how much wood could come in from Canada. Buyers held up purchases knowing this supply was coming.
- The Canadian dollar weakened all year, giving Canadian producers a currency translation edge.
- China construction weakened all year, reducing an export market for all producers.
- US housing starts were relatively strong in 2015 at 1.11 million units, but still below the longer-term trend.
Almost all of these issues are reversing or improving this year.
- The pine beetle pull forward is largely passed and Canadian harvests are expected to be lower this year.
- Obama and Trudeau recently discussed signing a new SLA soon during Trudeau's state visit.
- The Canadian dollar is still weaker than last year but has come off its lows.
- US housing starts are up solidly over last year, even adjusting for weather.
- Chinese housing starts have trended up the past few months and Japan's numbers remain firm.
Of these issues, I think the pine beetle and US housing are the biggest. Assuming the Canadians pulled forward a lot of production last year, which won't be repeated this year and US housing starts remain robust, there could be a material increase in lumber prices this year from last year's average futures price of $268 on the CME to something at or above the 5-year average of $296. Current price as of this writing of around $300 is nicely above prices this time last year.
There has been a lot of talk about pending lumber shortages in the US. If all of the above come to pass, this year could be the year it happens. I think WY's CEO, Doyle Simons bought Plum Creek to take advantage of this shortage, which wouldn't be a flash in the pan, but a multi-year phenomenon.
It's also important to note that even with last year's depressed prices, WY's cash flows were relatively consistent with previous years thanks to ongoing cost cuts and efficiencies squeezed out by WY management. In a good lumber and log price environment with a much larger base, WY's cash flow could soar.
Another thing WY has going for it: They are in the middle of a $2.5bln buyback, of which as of March 15, they had only completed $500 million (see page 3 of the slide deck).
With a lot of wind at the back, a management team with demonstrated ability to increase cash flow and return it to shareholders and a stable capital base, WY seems positioned for a multi-year super cycle.
Disclosure: I am/we are long WY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.