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Here's Why Investors Should Steer Clear of Weyerhaeuser Now

Zacks Equity Research

Weyerhaeuser Company WY has been witnessing higher volatility in wood products markets along with increased raw material costs of late. Despite being one of the leading U.S. forest product companies, its shares have declined 36.2% in the past six months, underperforming its industry’s fall of 31.8%.


Let’s delve deeper and try to identify the factors affecting this Zacks Rank #5 (Strong Sell) company’s growth potential.

Dismal Performance & Tepid View: During the third quarter of 2018, the company’s earnings and sales missed the Zacks Consensus Estimate by 28.2% and 2.6%, respectively. The poor performance was mainly due to significant headwinds from severe weather, trade policy and unusually volatile wood products markets. Also, adjusted earnings of 28 cents declined 17.6% year over year, given the said headwinds.

Moreover, its overall performance in the fourth quarter is likely to be affected by higher road and forestry costs, as well as a rise in fuel and unit-logging expenses. Additionally, lumber and oriented strand board prices continued to decline in the fourth quarter as well.

The company expects sequentially lower earnings and adjusted EBITDA from the Timberland business. Moreover, the company sees fourth quarter to be seasonally weak, as supply from non-industrial landowners remains low.

In the Wood products segment, the company anticipates fourth-quarter earnings and adjusted EBITDA to be significantly lower than the third quarter. Moreover, Real Estate, Energy and Natural Resources business is projected to report sequentially comparable earnings and adjusted EBITDA in the fourth quarter.

For full-year 2018, Weyerhaeuser expects total housing starts to be marginally lower than 1.3 million reported a year ago. The recently increased tariff on Chinese products is likely to pressurize the company’s performance in the near term.

Volatile Wood Products Markets: The company’s third-quarter average sales realizations reduced 9% sequentially. The decline stemmed from record volatility in lumber prices. During the first week of June 2018, framing lumber composite price hit record highs, followed by a steep decline of 25%, breaking its own records. Framing lumber composite price declined 13% in the third quarter. Therefore, lumber sales volumes declined 6% while manufacturing cost increased due to lower operating rates.

Estimates Trending Downward: Earnings estimates for the fourth quarter have remained unchanged over the past 60 days, while that of 2018 have moved 6.9% south, raising concerns surrounding the stock’s earnings growth potential.

The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 13 cents, reflecting a decline of 58.1% from the prior-year level. Also, sales are expected to decline 4.9% to 1.73 billion during the quarter.

Overvalued Compared to Peers: The company’s stretched valuation is another concern. Its trailing five-year price to earnings (P/E) ratio is 16.99, which is higher than the industry’s 13.54. This implies that the stock is overvalued compared to peers.

Stocks to Consider

Some better-ranked stocks in the Construction sector are Great Lakes Dredge & Dock Corp. GLDD, Gates Industrial Corp. PLC GTES and Lennox International, Inc. LII, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Great Lakes’ earnings in 2018 are expected to increase 111%.

Gates Industrial has an expected earnings growth rate of 44.6% for 2018.

Lennox International has a projected earnings growth rate of 18.9% for 2018.

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