# Weyerhaeuser: Behind The Numbers

I recently read several articles on Seeking Alpha by Jeff Williams where he uses nine criteria to judge a company's financial health. The criteria are simple and easy to obtain from company financial statements. Companies get a pass or fail on each criterion. Jeff generally uses year end data, so 2010 and 2011 are the most current figures. I thought it would be interesting to use Jeff's method on some of the companies that I generally write about, namely the timber REITs and Pope Resource. This article will analyze Weyerhaeuser (NYSE:WY) using Jeff's system. A "thanks" to Jeff Williams.

A. Profitability

In judging profitability, four criteria are used, Positive Net Income, Positive Operating Cash Flow, Increasing year over year ROA, and Operation Cash Flow being greater than Net Income.

1. 2011 Net Income \$331 million (Pass)

2. 2011 Operating Cash Flow \$594 million (Pass)

3. ROA = Net Income/Total Assets

2010 ROA =\$1,281/\$13,429 = 9.5%

2011 ROA =\$331/\$12,598 = 2.6% (Fail)

4. Quality of Earnings = Operation Cash Flow > Net Income (Pass)

Both Net income and Operating Cash flow are positive earning WY two passes. WY failed the ROA test because ROA went from 9.5% in 2010 to 2.6% in 2011. The Quality of Earnings test was a pass for WY as Operating Cash Flow was greater than Net Income. So far, WY has three passes and one fail.

B. Debt and Capital

In judging debt and capital, three criteria are used, Total Liabilities to Total Assets ratio, Current ratio, and Shares Outstanding growth being less than 2%.

5. 2010 Total Liabilities/Total Assets = \$8,815 million/\$13,429 million = 66%

2011 Total Liabilities/Total Assets = \$7,866 million/\$12,598 million = 62% (Pass)

6. Current Ratio = Current Assets/Current Liabilities

2010 Current Ratio = \$2,589/\$1,074 = 2.4

2011 Current Ratio = \$2,065/\$941 = 2.2 (Fail)

7. 2010 Shares Outstanding = 321,076

2011 Shares Outstanding = 539,879An increase of 68% (Fail)

The Total Liabilities to Total Assets ratio improved from 2010 to 2011 giving WY a pass on this test. However, the Current ratio decreased and the shares outstanding increased over 2% from 2010 to 2011 earning WY two fails. In the Debt and Capital tests WY has one pass and two fails. So far, WY has four passes and three fails.

C. Operating Efficiency

For Operating Efficiency two criteria are used, Gross Margin to Sales ratio and Sales Growth to Asset Growth ratio.

8. 2010 Gross Margin/Sales = \$1,123/\$5,954 = 18.9%

2011 Gross Margin/Sales = \$1,096/\$6,216 = 17.6% (Fail)

9. Sales Growth = 2011 Sales/2010 Sales = \$6,216/\$5,954 = 4.4%

Asset Growth = 2011 Assets/2010 Assets = \$12,598/\$13,429 = -6.2%(Pass)

Gross Margin to Sales ratio decreased from 2010 to 2011 earning WY a fail. However, Sales Growth outpaced Asset Growth earning WY a pass. In the Operating Efficiency tests WY has one pass and one fail. After the nine tests WY has five passes and four fails.

This would give Weyerhaeuser an average to poor rating based on only passing five of nine tests. However, to be fair, 2010 was not a typical year for WY. 2010 was the year that WY converted to a REIT, so many of the 2010 figures were affected by this one-time event. To name three, in order to qualify as a REIT Weyerhaeuser had to dispose of some assets, pay out a large special distribution, and incur some reorganization expenses. Some investors took the distribution in shares rather than cash, hence the large increase in shares outstanding. It will be interesting to see this analysis again using 2012 and 2011figures next January.

For the past four to five year, the timber business has been in the tank due to the crash in housing. Therefore, any bet on Weyerhaeuser is a bet on the future not the past. At this time, I think this type of analysis unfairly penalizes WY due to the REIT conversion in 2010, however, I still believe it to be useful. According to this analysis, Weyerhaeuser is in a relatively weak position for the time being, but I believe WY is poised for a strong comeback on a recovery in housing.

Disclosure: I am long PCL, PCH, RYN, POPE. 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.