It’s official: the housing market recovery is still chugging along. In fact, it appears to be gaining strength, at least according to the latest crop of data released yesterday that showed housing starts soared to an annual rate of 954,000 in December, dramatically above the revised 851,000 rate recorded in November and well above the 885,000 rate predicted by some economists.
That means that it’s time to take a hard look at lumber and timber companies. Not all forest products businesses are likely to benefit equally from this surge in new home construction: you may want to steer clear of integrated companies that have exposure to still-weak pulp and paper operations. And you may need to go north of the border to find some of the more appealing lumber and timber companies, ranging from Conifex Timber to Acadian Timber Corp., or the giant West Fraser Timber Co.
But on this side of the border there is Weyerhauser Co. (WY), which, in spite of reporting a 25% drop in its net income in the third quarter, has recently garnered analyst support from Raymond James and Amerprise Financial, evident in a stock chart.
While Weyerhauser’s stock price has gained ground in response to the housing recovery, its gains have been minimal when set beside those of homebuilding stocks. And yet the company’s assets are impressive, including some six million acres of timberland – and its return on those assets has rebounded to stronger level than PulteGroup (PHM) has managed to achieve.
Analysts also are looking for Weyerhauser to boost its dividend payout now that it is clearly back on the growth track, perhaps by as much as 50% over the coming 18 months. That would boost Weyerhauser's dividend yield, which is currently about 2.2%.
Investing in the raw material required by the housing market isn’t without its risks, of course. While lumber prices have risen, all that is required for them to dip again is for producers to ramp up production significantly. Lumber exports have declined, as Chinese demand has ebbed – an all-too-familiar story in all corners of the natural resources universe. But the urge on the part of North American 20-somethings to escape cramped apartments or the basements of their parents’ homes, and the need to repair housing damaged by Hurricane Sandy in the U.S. Northeast may offset some of those actual or potential negatives.
If Weyerhauser doesn’t appeal, you might take a look at Plum Creek Timber (PCL). Here is a company where the recovery already is contributing to the bottom line, and it offers a slightly more direct play on lumber than the more diversified Weyerhauser. Plum Creek, structured as a real estate investment trust (REIT), is the largest private landowner in the United States, owning about 6.6 million acres of timberland; it reported a jump of 18% in profits and 21% in revenue, although revenues from the timber business grew at a more modest rate of 9.1%.
Clearly, it’s time to look beyond the homebuilders themselves in search of other beneficiaries of the housing market’s growing recovery. Lumber is one part of this equation that has benefitted already, but where the kinds of risks associated with any commodity-related investment may well mean that not all the potential upside has been priced into stocks. Whether you choose an ETF or a stock; a pure lumber or timber play or a more diversified forest products company, a bet on the housing sector should involve some exposure to timber.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at firstname.lastname@example.org.
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