Weyerhaeuser Company: Neutral On Demand Concerns

Sep. 09, 2021 1:26 PM ETWeyerhaeuser Company (WY)12 Comments
Stella Mwende profile picture
Stella Mwende
1.43K Followers

Summary

  • Over the last 10 years, Weyerhaeuser's annual revenue surged 21.17% against a TTM overview of 60.59%.
  • Lumber output levels have declined among sawmills causing a sharp drop in prices towards $518 per thousand board as of September 8, 2021.
  • New home sales in the US have decreased from 1.2 million in 2005 to 815,000 in 2020.
  • Quarterly dividend payout may increase in 2022 after stagnating at $0.17 per share.
Weyerhaeuser Acquires Plum Creek Timber In $8.4 Billion Deal
Stephen Brashear/Getty Images News

Weyerhaeuser Company (NYSE:WY) has grown as a global operator of timberlands with an ownership of more than 12 million acres in the US alone. The company has been sustained by the thriving housing market that has grown even during the COVID-19 pandemic. Further, several factors have proven to be key drivers of returns to investors in the timberland space. Change of price of timber, appreciation of the land value, and development of total biomass (from pulp to timber). However, in this article, I will give reasons why I am neutral with Weyerhaeuser despite organic growth prospects amid demand concerns.

The numbers are great

Weyerhaeuser Co’s stock has risen 105.28% in the last decade. Growth was cut to 13.65% in the past 5 years and 24.41% since September 2020. Net earnings in Q2 2021 stood at $1.0 billion and robust cash flow of more than $1.3 billion. Over the last 10 years, annual revenue surged 21.17% against a TTM overview of 60.59%.

Source: YCharts

The pandemic provided fodder for the much-needed growth with the total revenue (TTM) growing to $9.823 billion from $7.532 billion as of December 2020. This increase was partly attributed to the surge in the Do-it-Yourself (DIY) housing project space.

Lumber and DIY Projects

Q2 2021 saw lumber prices surge 29% as compared to Q1 2021. DIY home repairs/re-modeling activities during the pandemic helped to improve customer spending, especially on lumber. Chicago lumber prices hit their all-time high of $1,686 per thousand board (on May 7, 2021) after a steep climb from March 2021.

Source: Trading Economics

However, output levels have declined among sawmills causing a sharp drop in prices towards $518 per thousand board as of September 8, 2021. The US construction industry is also expected to decline after topping $1.36 trillion in December 2020. Analysts are optimistic that the lumber sell-off will end before 2021 with timber companies dusting off the low yields.

In its quarterly revenue analysis, West Fraser Timber’s (WFG) gross profit in Q2, 2021 jumped 95.09% to $2.544 billion. This increase represented a rise of close to 1,000% since June 2019 when the gross profit stood at $232.1 billion.

Louisiana-Pacific Corporation’s (LPX) revenue (since June 2020) has increased 141.79% to $1.325 billion with gross profit up more than 500% in the same period. In my view, LPX is a top-performing US-timber company with a stock surge of 100% in the past year.

In the long term, the decline in lumber prices has strengthened the demand for more building projects. The increased affordability status is also a run-up to additional DIY projects after it slid in Q2 2021.

DIY giant- Home Depot (HD) increased its market capitalization to $348.63 billion and its stock rose 21.99% in the 1-year analysis. We are expecting an increase in new home sales into 2022 as home-furnishings become affordable.

Source: Huduser

New homes sold in the US increased to 815,000 in 2020 up from 306,000 in 2011 (+166.34%). However, the number has decreased from 1,283,000 recorded in 2005. The decline was attributed to the housing bubble that preceded the 2007-2008 recession propelled by low mortgage rates (that led to a rise in subprime debt).

The high lumber prices, however, have led to a decrease in the sale of wood products. Additionally, the ease of COVID-19 restrictions is expected to alter customer spending. WY is expecting lower EBITDA into Q3 2021.

The adjusted EBITDA for WY’s timberlands business is expected to decrease by $25 million in Q3 2021. Lower sales of domestic logs will feature into 2022 including low salvage productivity. In the short term, the company is expected to experience a slow recovery from the effects of Hurricane Ida that has increased operating costs in Q3 2021.

WY expects higher export demand of wood to Asian countries such as Japan as the world continues to battle COVID-19 restrictions. However, Japan’s household spending has weakened from a 5.6% spike in July 2021- hitting a 13-year high.

Core consumer prices also decreased 0.2% (on TTM analysis) that saw the index declined 0.2%. However, Japan may increase its timber imports as it favors woody biomass in energy production as compared to coal combustion. Lower consumer prices may work to reduce the import price of timber despite a surge in demand. The government may boost local production to ease supply disruptions post-pandemic.

Low Dividend Yield

Ahead of its $0.17 per share (quarterly) dividend payment to shareholders on September 17, 2021, investors will realize a forward yield of 1.95%. However, the yield (TTM) over the past year has declined 59.81% and -39.69% since 2016.

Source: Seeking Alpha

The reduction of the dividend stands out as a one-sided move by the management to cut down expenses at the expense of shareholders. As of March 2020, the quarterly dividend payout was $0.68 per share before it was halved a year later. This amount was also decreased from $1.36 per share recorded in 2019.

Dividend payout is not commensurate with the business performance since it is declining despite the latter’s improvement.

However, optimism still abounds as the dividend may be paid based on the earnings of the prior year (including the base dividend and an earnings bonus). Improved earnings in 2021 may push a dividend increase into 2022 or 2023.

Labor Shortage

In a recent US survey, 72% of the polled contractors in the construction industry stated that poor skill sets were the leading cause of low employment rates in the industry.

Labor supply problems in the timber industry have been cited as a leading challenge to the performance of the sector amid the COVID-19 pandemic. The recession of 2008 has weakened skill acquisition in the construction industry coupled with the restrictions placed during the pandemic.

Productivity in the real estate space requires long-term skill sets with available personnel trained for 15 to 25 years. After the 2008 recession, it took workers almost 4 years to continue with the construction training with an additional 4 years needed to acquire experience in the sector.

Therefore, 8 years after 2008 adds up to the year 2016, when construction workers were expected to increase their skillset and fit in the US job market. The COVID-19 pandemic has also caused this stop-and-restart training nature in the construction industry.

Bottom Line

No doubt, Weyerhaeuser's numbers are great but topline growth may be hampered by demand concerns. While the continual decline in lumber prices may attract customers, it may continue to lower output as timber companies seek to decrease aggregate supply to push up prices. Additionally, consumer spending has been altered in both the US and Canada as the COVID-19 restrictions continue to be eased. For the moment, a neutral position will suffice as we observe market dynamics surrounding the post-pandemic propulsion of the timber business.

This article was written by

Stella Mwende profile picture
1.43K Followers
I have more than five years experience in the financial industry. I focus mostly in the commodities, foreign exchange and cryptocurrencies. I also write on general issues like equity research, economics and geopolitics.Fellow contributor Crispus Nyaga is my colleague.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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