Weyerhaeuser: Well-Positioned To Grow

| About: Weyerhaeuser Co. (WY)

Weyerhaeuser Co. (NYSE:WY) just reported its Q4 financial results for fiscal year 2013. The company owns and manages timberlands in the US and Canada. It operates facilities that produce wood and specialty cellulose fibers products. In this article I will be examining the company's recently reported performance. I will pay close attention to the company's future outlook considering prospects from the industry as well as recent strategic moves initiated by the company.

Commentary on Full Fiscal 2013 Results

After divesting from its real estate business during November of fiscal year 2013, the company now operates three business segments: timberlands, wood products and cellulose fibers.

Source: WY 10K Filing and Earnings Release

From the table above you can see that the company generated 47% of its total revenue from wood products in 2013. The segment has been recording above 30% growth in revenue from 2011 to 2013 due to rising demand from the Chinese markets despite adverse weather conditions that impacted volume. The cellulose fibers segment is the second largest contributor to the company's revenue but experienced difficulties in 2012 when its revenue declined by 9.9%. The segment logged a slight recovery in revenue in 2013 but I will discuss the future outlook of this segment in the industry analysis below. The company's timberlands segment also performed well in 2013 in terms of revenue while the company has decided to exit from its home-building segment operated through its WRECO subsidiary. I will refer back to this strategic move later on in my analysis.

As far as the bottom line is concerned, the timberlands and wood products segments registered tremendous growth in earnings as shown in the table below. Earnings from the company's cellulose fibers business declined but the real estate segment recorded a huge loss in fiscal year 2013 due to heavy impairment charges resulting from the divestiture of the homebuilding unit to Tri Pointe (NYSE:TPH).

Overall the company's fiscal year 2013 net earnings rose 40% to $540 million or 95 cents/share as net sales rose 20 percent to $8.5 billion. The company's EPS, before special items, was $1.14 for fiscal year 2013, almost double the 58 cents earned in 2012.

Now let's have a look at the future prospects of the company based on the industry outlook.

Industry Performance and Outlook

US Housing Market

Although the company has decided to exit its operations related to real estate and concentrate fully on its forest products, the US housing sector is still a customer of the company's forest products. So, I am also considering the outlook of this sector to understand the company's future prospects as the demand for the company's timber products in the US depends materially on its housing sector.

Source: WY Investor Meeting Presentation

The US housing sector has been forecasted to rebound in the coming years as indicated by the chart above. New residential construction along with usage of wood products in repair, remodeling, and industries will drive growth for the company's OSB and engineered wood products, the forecast of which you can see in the graphs below.

Source: WY Investor and Analyst Meetings Presentations

Economic recovery in the form of declines in unemployment rates, increases in consumer income and spending as well as consumer confidence will turn into macro-economic factors supporting the growth of this industry in the US.

Export Growth

The following graph offers information regarding the company's potential in export markets.

Source: WY Investor Meeting Presentation

In 2012, 30% of the company's total consolidated sales and revenues were generated through sales outside of the US. Further growth in offshore demand for the company's products is expected to come from Canada due to the timber supply shortage as well as from the Chinese, Japanese and Korean markets. Long-term demand for wood-based housing as well as rising wealth and urbanization will trigger demand for industrial and interior usage of wood. You can see the pattern of exports to these leading nations from the chart on the left above. The chart on the right portrays the decline in the Canadian lumber share of US markets. From the chart you can see that Canadian production of lumber is expected to decline to 25% of the US market by 2015 which will turn into more demand for US forest produce.

Next I will examine the outlook of the company's cellulose fibers segment that is currently experiencing difficulties.

Demand for Cellulose fiber/pulp Products

Source: WY Investor Meeting Presentation

From the graph above it is evident that there are positive forecasts for the demand of fluff market pulp consumption around the world. This will boost the prices of these products and the company will get the chance to improve income for its cellulose fibers segment.

Forty percent of the company's pulp products are used as fluff in diapers and personal care products as shown in the pie chart below. The overall economic recovery is expected to boost the spending on these personal care products turning them into growth drivers for the company.

Source: WY 2013 Analyst Meeting

In addition to these external factors, the company is also enacting internal initiatives to improve its performance. These include structural changes through divestitures and acquisitions along with setting strict productivity and cost-saving targets.

Other Favorable Moves

WRECO and TRI Pointe Combination

The company has taken divestiture from its Weyerhaeuser Real Estate Company (WRECO) and combined it with TRI Pointe through a tax-free transaction worth around $2.7 billion. WRECO is Weyerhaeuser's homebuilding subsidiary. The transaction is expected to be completed by Q2 of fiscal year 2014. This move will combine the industry-leading management at TRI Pointe with WRECO's strong local market franchises and management teams along with merger of land position of more than 30,000 lots. Weyerhaeuser's shareholders will have an 80.5% stake in this while existing TRI Pointe shareholders will hold the remaining 19.5% stake. This move will allow the company to concentrate more on its core forest operations and add more value for its shareholders.

Longview Timber LLC Acquisition

Through this acquisition the company received an additional 645,000 acres of high-quality timberlands in Washington and Oregon. The transaction was worth $2.64 billion and is expected to bring in additional EBITDA for the company in the coming years (see graph below).

Source: WY Investor Meeting Presentation

The company expects around $20 million in annual costs and operational synergies over the next two years as well as the potential to increase dividends paid to shareholders.

Cost-savings Targets and The Quarter Ahead

The following charts highlight the company's targets with regards to cost reduction within its segments.

Source: WY Investor Meeting Presentation

As a result of achieving these targets, the company expects growth in this EBITDA for the coming periods (see chart below).

Source: WY REIT Week 2013 Presentation

The company expects much higher earnings from its timberlands segments in Q1 of fiscal year 2014 due to improved selling prices and volumes and rising export demands. For the wood products segment earnings are anticipated to increase mainly as a result of improved lumber selling prices and volumes. These are estimated to somewhat counterbalance higher log costs and hard weather conditions. On the other hand, the company expects lower earnings from its cellulose fibers segment during Q1 fiscal of year 2014 due to the fall in its pulp sales volumes and increased expenses partially offset by better realizations from liquid packaging board. The company did not propose guidance but the consensus forecasts calls for EPS of $0.29 and revenues of $2.16 billion for the current quarter and $1.41 per share and $9.46 billion for the full fiscal year 2014.

Concluding Remarks

The company is well-positioning itself structurally to capture a stake in the upcoming growth in the industry. Both the top and bottom lines of the company are likely to receive benefits from recovering product demand and this will enable the company to receive better prices for its products. Additionally, the company has set targets to improve its internal performance. This has allowed me to regard the company as a good investment opportunity and the company's management supports the notion of sharing the company's earnings with its shareholders in the form of rising dividends.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article

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