Weyerhaeuser Surges on Sandy, but Wait for Lower Levels

TheStreet.com

NEW YORK (TheStreet) -- When it comes to playing the housing recovery, investors have plenty of choices. Home-improvement stores such as Lowe's and Home Depot come to mind.

But even astute investors sometimes overlook the brands that they actually go to Lowe's or Home Depot to buy. Timber maker Weyerhaeuser , headquartered in Federal Way, Wash., is not widely recognized as a household name, but it would be hard to find another company more closely tied to the housing market.

The market has been more inviting to Weyerhaeuser lately, with shares up close to 70% over the past 12 months. Now that the price-to-earnings ratio has reached 34, the stock trades at a valuation that is 15 points and 14 points higher, respectively, than the industry average and sector average.


Weyerhaeuser's resurgence is a surprise for some. But for TheStreet's Jim Cramer, it's par for the course. On Nov. 11, Cramer essentially called the bottom on (among other stocks) Weyerhaeuser when the stock was trading at about $26, or 23% below its recent high.

Cramer cited the destruction of Hurricane Sandy as a possible catalyst for home reconstruction, which would spur increased demand not only for Weyerhaeuser's wood products but also for those of rival companies such as Louisiana Pacific , which has risen 53% since its November low of $14.72.

Weyerhaeuser, which posted a 25% gain in fourth-quarter revenue, has been an early beneficiary of Sandy. Weyerhaeuser's P/E of 34, 1 point higher than what the company has averaged over the past couple of years, causes concern that the market has already priced in a full housing recovery, especially when looking at Louisiana Pacific's valuation (P/E of 92), five times the S&P 500.

Still, with improving consumer confidence and low mortgage rates, things are looking up for Weyerhaeuser. Home prices rose nearly 10% in January, the biggest increase in almost seven years, a good sign for the company's wood and timberland products.

Better Profitability Offsets Sequential Weakness

Revenue arrived up 31% year over year to $1.95 billion, beating estimates by more than 4%. The performance follows a strong 25% revenue surge in the fourth quarter. But there was also a 2.5% sequential decline in revenue.

Weyerhaeuser showed strong growth in wood products, the company's largest business, which posted a 54% year-over-year increase in revenue, rising 18% sequentially. On a sequential basis, timberland sales advanced only 7%. Sale of cellulose fibers were roughly flat year over year, but up only 2% sequentially.

Although Weyerhaeuser's real estate business was up 43% year over year, revenue plummeted by more than half (-51.8%) since the January quarter.

Weyerhaeuser's profitability, which tripled in the first quarter, more than made up for any near-term revenue concerns. Net income arrived at $144 million, or 26 cents per share, beating estimates of 23 cents. This was Weyerhaeuser's strongest profit showing in almost eight years, or three years before the housing crash.

Gross margin jumped 8 points to 21.4%, even as input costs rose 19%.

How much of Weyerhaeuser's second-quarter profits will be impacted if input costs continue to rise? That would have a negative impact on gross margins, especially because gross margin, which was up year over year, were flat from the fourth quarter.

Management doesn't expect margins to sway much in the second quarter, though, even as the company projects higher selling-related expenses due to the number of homes that the company anticipates will be closed. At the end of the first quarter, there was a backlog of more than 1,100 homes that were sold but not closed. Of these, management expects to close more than half, which would boost second-quarter revenue and profits.

Moving Forward

The report was good but far from spectacular. Given the high expectations presumed in the stock price, I expected a more bullish outlook from management. It seemed analysts at UBS concurred, because they issued a sell rating on the stock on April 29, while setting a price target on $24. UBS didn't have a favorable rating on the stock when it surged 23% from its November low, either.

Analysts at Raymond James and BMO Capital have upgraded the company to outperform and market perform, respectively. Argus has a buy rating on the stock with a $36 price target, a 20% premium from current levels. Outlook on the stock is mixed because there's a wide range of approaches to valuing companies in this sector.

Not only are consensus EPS estimates strong for fiscal year 2013 at $1.23 per share, but the growth is expected to continue into next year as evidenced by fiscal 2014 estimates of $1.49 per share.

Given that Bloomberg expects Weyerhaeuser to report revenue for fiscal 2014 of $8.9 billion, this stock can yet be undervalued if the company is able to meet this revenue target along with EPS estimates of $1.49 per share.

Weyerhaeuser's average P/E over the past couple of years has been 33. With fiscal 2014 EPS projections of $1.49, this stock can possibly reach a fair value of $50, which would make the stock a strong buy today.


Bottom Line

Weyerhaeuser (the surname of co-founder Frederick) has a solid market position when it comes to timberland and wood products. The question, though, is what phase of the recovery the market is in. Given Weyerhaeuser's strong first-quarter performance and solid second-quarter guidance, I won't dispute that this century-old company is growing and should continue to be a solid play in new home construction/rebuilds.

On the strength of a sustained housing recovery, including 2013 housing starts, which is at an estimated 990,000, there's still plenty of justification for long-term bullishness. In the near-term, however, the stock might need a breather, and a slight pullback, possibly to $27 per share, would be a great point of entry.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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