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David White is a software/firmware/marketing professional and a long time investor. He has worked in the networking field, the semiconductor equipment field, the mainframe computer field, and the pharmaceutical/scientific instrumentation field. He has bachelor's degrees in bioresource sciences... More
  • WY: Lumber Isn’t Going Anywhere 1 comment
    Jan 15, 2010 2:57 AM | about stocks: WY

    Lumber futures were up $13 on the January futures contract today to $226. You would think this would mean most lumber companies would be up, but WY was down. This seemed very odd to me. At first I thought maybe it was the Chinese. For the last couple of months they have been announcing tightening moves. What this ultimately means is that there will be less construction than there would have been. Since I hear there are many commercial buildings currently sitting idle and empty in China at the moment, this may be a good thing. There will likely be less residential building in China too, since credit will be harder to get, and prices (which spur building) will not be increasing as quickly. This means that there will be less need for lumber. “What a great rationale?”, I thought; but the lumber futures went up today, so I wasn’t satisfied.

    Looking around in the news I found a Los Angeles Times article on railroads dated today (Jan. 14, 2010). According to it, “Freight trains carried 20 percent less cargo last year than in 2008, according to a new report by the Association of American Railroads, and the industry shed nearly 21,000 jobs. The 12-month period was the slowest since the association began keeping records in 1988. Among the most dramatic declines was a 33 percent drop in

    Taken over a two year period that included all of 2008 and 2009, the declines were even more dramatic, according to the report: a 48 percent drop in the transportation of motor vehicle parts; a 49 percent drop in metallic ores and metals; and a 47 percent drop in lumber and wood products carried by train, a key indicator of demand for new construction. Trains carried 34 percent fewer motor vehicle parts and 8 percent less coal. lumber and wood products.
     

    By last month, though, the picture was beginning to brighten. Twelve of the 19 main commodities hauled by trains _ including grain, chemicals and petroleum and automobile parts _ showed growth during December when compared to the same period a year earlier. The number of rail cars in storage also began to drop in December, indicating another up tick in business.”

    This last might seem like good news, and it is. However, it also indicates how far these industries have fallen. It indicates how far they have to come back. The news for coal was less bad, as transport of it was down only 8% in 2009. For lumber, auto parts, and metallic ores and metals the numbers were disheartening. The transportation of each of these has gone down 47% or more in the last two years (2008 - 2009). It was down 33% for lumber in 2009 alone. This is really a knife to the heart for owners of WY.

    WY is set to lose -$1.94 in FY2009. It is estimated to lose money in 2010 as well. It has not made money FY since 2007. The railroad article indicates just how far it has to go to come back. It won’t be this year. With the China tightening, it really won’t be this year. China demand was the big factor in the lumber futures recovering last spring. If China will now be slowing its lumber use (as is likely), WY will take that much longer to recover. The demand for new commercial and residential real estate new building in the US is very low. That demand is not likely to recover soon. Cramer says that’s a good thing because we can get rid of some of our excess supply more easily then. That’s how bad the lumber business will be in the US in 2010 (and perhaps 2011). The almost 50% lower transportation figure for lumber in 2009 vs. 2007 is a reality check for investors. It should be listened to. The estimates for WY for 2010 are probably high. They likely don’t factor in a slow down in growth of lumber use by China. When a lumber company, without any bad news of its own for the day, goes down with lumber futures up $13 on the day, that company is troubled. I will leave the more nitty-gritty fundamentals for another day. Instead I say to you, “Listen to the rails. You will hear the train coming from much farther away. You will have plenty of time to make up your mind what to do.Today that train is the SELL train.”

    WY has announced that it intends to become an REIT sometime within the next year (2010). One problem with this is that it will have to pay out nearly $6B to shareholders. Sounds great for shareholders, but wait a minute for the gotchas. At the end of last quarter, the assets - liabilities = $4.349B. This is less than WY legally has to pay out. WY will try to solve this problem by paying out the monies with about 90% in stock. This will cause dilution. However, that dilution will go to the shareholders. Still they really won't be getting a real payout, except the part they get in cash. Further the credit agencies are now more worried than ever about WY's debt. Since WY will have to pay out 90% of profits to shareholders as an REIT, it will not be able to pay down on its debt as it becomes more profitable except by issuing mroe stock. This means shareholders shares are likely to go down due to future stock issuances after the conversion to an REIT. In other words stockholders will get payouts, but their stock value is likely to go down due to perpetual stock issuances.

    The charts below further illustrate the current situation: 

    WY 2 year chart:

     

     

    WY 3-month chart:

     



    Lumber Futures chart:

     

     

     

    From looking at the charts above, one can see that WY is trending down slightly at a time when lumber futures are clearly trending up. You can also see a trend of money flow out of WY. Look closely at the end of the lumber chart and at the end of the 3-month WY chart to see these things.

    When you can see this kind of counter trend for a commodity stock, it is time to sell. It may be time to consider buying puts on the stock. You may not wish to short it because you might end up being responsible for paying the dividend. LEAP puts might be a better idea.

    Good luck trading.


    Disclosure: Bought a few puts on WY.
    Stocks: WY
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  • It is not going anywhere now but it does when it does. For fools buying gold and putting it in a vault, WY maybe a good alternative. At present price per share it might take 100 shares to buy 1 acre of their fee simple land and to get a typical urban lot of 5000 ft it costs you only $345 equivalent and it pays a dividend because it is managed land and not just an alligator as realtors tend to call bare land that produces nothing and just eats. If I were Larry Elison I might wait till the price falls and try buying it all for a few billion dollars. Right now its spendy at around17 billion dollars if you bought it all with no added buyers premium. It may or may not be over fair value but when it comes to fair value I would say gold is way out of line now when the intrinsic cost of mining new gold is less than $400. WY land fee simple and leased has significant product value including fracking gas that is not something that is factored in the price.....
    21 Mar 2013, 01:32 AM Reply Like
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