Weyerhaeuser Is Inflationary, Not Cyclical
Summary
- Earnings per share in the first quarter were $1.31, up 44% year over year. Wood Products which is lumber, plywood, and engineered wood were 82% of Adjusted EBITDA.
- Wood Product volume was about the same, the growth was from higher prices.
- The Wood Products go into residential construction and repair and remodeling with minor commercial construction.
Stephen Brashear/Getty Images News
Weyerhaeuser Business
Weyerhaeuser is a very well-run company. They own 11 million acres of forestland in the United States and lease 14 million acres in Canada. The company boasts that it sells 95% of the timber it processes. The production goes into diapers, mulch, and a variety of other products. Timberlands manage the forests, harvest the trees, and sell them largely to wood products. They have another operation that provides recreational uses of the forests and generates electricity from renewable sources in the forests. A new division is being established to store carbon. That operation is expected to have sales of $100 million by 2025. The business is environmentally sound and plants new trees to replace the trees that are cut down.
The Residential Construction Market
Weyerhaeuser cannot be valued without understanding the U.S. construction market. It has been widely viewed as a cyclical business because construction is viewed as cyclical. The housing bubble in California and other expensive markets created that impression. However, there has been a shortage of housing built since the collapse in 2008. There is currently a shortage of housing which will take years to clear. It is not only residential construction there is a shortage of rental properties, which is leading to a sharp increase in rents.
it was expected that housing starts would drop off because of higher mortgage rates. However, housing starts and permits are continuing to rise despite the higher mortgage rates. This should not be a surprise. With rents getting incredibly expensive then the desire will be to build even if it's going to be in a multi-unit property.
One of my tasks in a former corporate development job was preparing the housing start forecast as part of the annual operating plan. I understand how quirky housing can be. For example, in older rustbelt cities you can't build a house as a practical matter. The economics don't justify the cost given the inventory of existing homes. In other areas such as the Midwest where growth is available, there are housing developments on the fringe of the city. You can see developments in upper-income houses as well as developments for middle income.
In communities such as the east and west coasts, there is a tremendous shortage of housing often driven by restrictive zoning. This has led to long commutes for people looking for affordable housing. In California there is the Yimby movement as a counter to Nimby or not in my backyard. This movement attempts to change local zoning so that lower-cost multi-unit developments can be built. This will be a very slow process because there are towns with single-unit lots only and the residents of these communities view mufti unit as a threat to their housing wealth.
The market for multi-unit housing in places like California is something that will provide potential demand in future years, but it will take years to develop.
Repair and remodeling also require lumber. With homeownership generating substantial wealth, there is a tendency to remodel. Homeowners believe that this will make the house even more valuable than the cost of remodeling. My experience from a previous job indicates that expectation is usually unrealistic but that does not stop people from remodeling.
Lumber Price Trends
Wood prices increased radically in early 2021 peaking in May of that year. Prices dropped but not drastically and increased the first quarter of 2022. They are still high. The forecasting firm Random Lengths projects lumber at $1000 and projects that will continue through their Futures Trading. So, pricing for the year 2022 could be lower than 2021 but not drastically. In future years pricing could moderate but it is still far above it where it's historically been. In 2022, Weyerhaeuser is expected to increase lumber production by about 5% per year. This year their expectation and those of their competitors is for higher growth and the prices make it attractive to increase capacity.
Weyerhaeuser Cash Flow
In 2021, Weyerhaeuser’s dividends per share were $2.63. The normal quarterly dividend was $0.68 a share and special dividends of $1.95. Weyerhaeuser is a REIT which means that 75 to 80 percent of cash must be paid to shareholders. Weyerhaeuser paid total dividends of 79% in 2021. The payments are tax-free.
First Quarter Results
The rapid year over year growth is summarized below:
Weyerhaeuser | ||||
$ millions | ||||
First Quarter | ||||
2022 | 2021 | Growth | Percent | |
Net Sales | $ 3,112 | $ 2,506 | $ 606 | 24% |
Adjusted EBITDA | $ 1,497 | $ 1,101 | $ 396 | 36% |
Net Cash | $ 957 | $ 698 | $ 259 | 37% |
Earnings/Share | $ 1.31 | $ 0.91 | $ 0.40 | 44% |
before special items | ||||
Table by Author
The projection for a full year
Lumber prices in the first quarter of 2021 had not reached the peak that they achieved in the second quarter. Prices in the last half of the year moderated while the quarter prices were stronger. Lumber Inventories are tight because distributors and builders fear of buying inventory that might fall in value.
The table below is a projection for the full year.
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Risks and Opportunities
The biggest risk would be a decline in lumber prices to a more normal level. The high prices spurred the industry to add capacity so that in coming years additional plants will be built to process logs into lumber. It is likely that several years from now, prices will have returned to a more normal level and that a special dividend will be much smaller. The use of forests to capture carbon should be a $100 million business by 2025. It is very likely that carbon capture will continue to grow rapidly and help offset some of the decline and lumber prices after 2025.
Conclusions
Weyerhaeuser offers the opportunity to earn large tax-free Dividends. In the last four quarters, the price-earnings ratio is 12, this is an unusually low-price earnings ratio. Yes, prices of lumber will decline but it will be a slow process. For this stock, inflation is great news this year. The housing demand and lumber prices will be strong for the next few years. Weyerhaeuser is a strong buy.
This article was written by
Analyst’s 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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Comments (16)
Because the income generated by the sale of standing timber is generally considered capital gains, much of the income generated by Weyerhaeuser and distributed to shareholders is taxed at capital gains rates. Since Weyerhaeuser’s conversion to a REIT, our dividends have been taxed as long-term capital gains for most US stockholders.
WY & PCH can! Forget the wood business - it’s all backed up by extremely valuable land.
"Buy land because their not making any more of it" Will Rogers