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Between an Obama victory and continued European turmoil, the market got crushed as the DJIA, NASDAQ and S&P 500 each declined over 2% on the morning of 11/7/12. Amidst the sell-off, Weyerhaeuser Co. (NYSE:WY), a Timber REIT, has held strong and even gained on the day. What has caused WY to gain against a falling market? Well, it has been the recipient of a slew of good news coming from every angle. The fundamentals of the lumber industry have been on the rise for a while now, but recently there have been events and reports which kick it into the next gear.

· The Census Bureau reported the creation of 1.15mm additional households in the twelve months ended September 2012. When compared to the 1.25mm average annual new households of the boom years, it seems the housing market is well on its way to recovery. In terms of how this would affect demand for construction of new housing, critics would argue that it is simply absorbing the excess supply built and vacated during the bubble. While this may reduce its effect on current construction demands, it still paves the way for future activity as the supply becomes exhausted.

· An article by Time Business estimates the damage from hurricane Sandy to be approximately $60B with $20B of that attributable to property damage. Once the area gets cleaned up and the rebuilding/repairing efforts commence there will undoubtedly be a spike in demand for wood products.

· Oil and gas prices have declined slightly. This has a greater impact on the lumber business than other kinds of products due to the size and weight of the product as well as the average distance of transportation for sale.

Company (ticker)

Recent Market Price

Net change on 11/7/12

Total returns over past 52 weeks

Plum Creek (NYSE:PCL)

$43.30

(0.73%)

22.1%

Potlatch Corp. (NASDAQ:PCH)

$38.35

(1.31%)

27.3%

Rayonier (NYSE:RYN)

$49.26

(0.20%)

23.7%

Weyerhaeuser

$27.30

0.26%

65.5%

The outperformance of WY against this down market was not an isolated event as it has beaten its competitors over the entire year. Most of the aforementioned events seem to benefit the entire lumber REIT industry, so how has Weyerhaeuser been able to outperform its competitors?

It is largely due to WY's extra exposure to the housing recovery. In addition to the benefit all timber REITs are getting from the increased demand for wood products, Weyerhaeuser participates more directly through their single-family homebuilding business. $17mm or about 14.5% of WY's 3Q earnings were from this segment. While the seasonality of construction will weaken this segment in the 4th quarter, strong closings demonstrate its continued importance. Additionally, it will receive some extra business from the hurricane rebuilding in its Maryland and Virginia operations. We would be wise, however, to not overestimate this effect as a majority of its single-family homebuilding segment operates on the West coast.

As an Investment

Weyerhaeuser expects its earnings and margins to decline in the fourth quarter, but this is very temporary. The earnings decrease is from the aforementioned seasonality of their homebuilding, and the margin loss is from a different mix of closings and increased silviculture costs. To specify, the mix refers to the type of homes built and sold. In the third quarter they sold an atypically high ratio of high margin homes, so as that normalizes margins will be reduced. Going forward, I believe WY's earnings will grow at a nice pace as the market continues to improve. It still has capacity to increase its harvest volume as log prices rise. It may be the best choice for exposure to the timber REITs, particularly if the industry continues to be fueled by the domestic housing recovery.

Disclosure: This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer.

Source: Weyerhaeuser: Black Ink In A Sea Of Red