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The Zacks Building Products - Wood industry has been gaining traction of late. Strong demand for repair and remodel (R&R) activity, resilient prospects of the U.S. housing industry and higher lumber prices are helping industry players like Weyerhaeuser Company WY.
Weyerhaeuser’s intense focus on the Wood Products segment, operational excellence and shareholder-friendly moves is benefiting the company. Also, strong prospects and stable balance sheet position are encouraging.
However, its shares have declined 7.8%, wider than the industry’s 3.6% fall in the past three months. Nonetheless, the company has outperformed other industry players like Louisiana-Pacific Corporation LPX, UFP Industries, Inc. UFPI and Masonite International Corporation DOOR in the said period.
This outperformance can be primarily attributed to Weyerhaeuser’s impressive year-over-year earnings and revenue performance. Both the top and bottom lines improved impressively on a year-over-year basis. Adjusted EBITDA increased a significant 166.6% year over year, marking the highest quarterly growth in its history.
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Let’s delve deeper.
Strong Housing Market Prospects & R&R Activities: Housing markets are booming, owing to the lack of existing homes for sale and continuation of the still-low rate environment. Demand for housing and wood products has been improving amid COVID-related disruptions as well as rapid lumber market swings. Apart from remarkable recovery in single-family housing construction, repair/remodel activity has also been robust, supported by do-it-yourself and professional activity. Greater-than-expected demand for home improvement products has also been benefiting the company.
For second-quarter 2021, it expects Wood Products’ earnings and adjusted EBITDA to be significantly higher on a sequential basis. Also, it expects increased sales volumes for lumber and sales realizations for EWP — partly offset by higher raw material costs, mainly for OSB webstock — as well as lower operating rates for OSB due to planned maintenance outages.
Strategic Initiatives: Weyerhaeuser has been undertaking a number of initiatives in order to drive profits in the long run. It remains focused on operational excellence that includes merchandising for value, harvest and transportation efficiencies along with flexing harvest to capture seasonal and short-term opportunities. The company reaped approximately $100 million benefits, company-wide, owing to operational excellence improvements in 2020. For first-quarter 2021, Weyerhaeuser came up with its highest quarterly adjusted EBITDA on record. Notably, this initiative led to more than $0.5 billion of company-wide margin improvement from 2014 through 2019. For 2021, it expects another $50-$75 million of operational excellence improvement across businesses.
Shareholders Moves: Weyerhaeuser has been rewarding shareholders through dividend payments over the past several years. The company paid nearly $127 million cash dividends in first-quarter 2021 and $381 million in 2020. The move is a reflection of its strong cash position and sound capital allocation policy.
The company’s cash and cash equivalents at first quarter-end were $1.02 billion, up from $495 million at 2020-end. Moreover, cash from operations for the quarter was $698 million compared with $86 million in the year-ago period. This marked its highest quarterly operating cash flow since fourth-quarter 2006 and strongest first-quarter cash flow on record. Weyerhaeuser used a major portion of this cash to strengthen the balance sheet by redeeming some of its 2023 debt maturities.
Prospects: Weyerhaeuser has strong prospects, as is evident from the Zacks Consensus Estimate for 2021 earnings of $3.70 per share, which has been revised upward in the past 30 days. Moreover, its earnings are expected to increase 186.8% year over year in 2021.
The consensus mark for revenues is pegged at $10.22 billion, signifying 35.7% year-over-year growth. These solid projections make this Zacks Rank #1 (Strong Buy) stock a profitable pick. You can see the complete list of today’s Zacks #1 Rank stocks here.
A solid VGM Score of B is another reason for investors to believe in its fundamentals, supported by a Growth Score of B.
Cheaper Than Industry: Weyerhaeuser is a great pick for investors as it is cheaper than the industry. The trailing 12-month price-to-earnings multiple for the company is 16.82, cheaper than the industry’s 18.83.
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