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Low Lumber & OSB Prices to Hurt Weyerhaeuser (WY) Q2 Earnings

Zacks Equity Research

Weyerhaeuser Company WY is scheduled to report second-quarter 2019 results on Jul 26, before the opening bell.

In the last reported quarter, this wood-based building products manufacturer’s adjusted earnings of 11 cents met the Zacks Consensus Estimate but net sales of $1,643 million missed the same by 5.2%. On a year-over-year basis, both the top and bottom lines declined 11.9% and 69.4%, respectively, owing to unfavorable average sales realizations for oriented strand board (OSB), domestic and export logs, as well as lower volumes. The trend is likely to continue in the to-be-reported quarter as well.

Also, it is to be noted that the company missed the consensus estimate in two of the last four quarters, with the average negative surprise being 7.5%.

Which Way are Estimates Trending?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release.

The Zacks Consensus Estimate for the to-be-reported quarter’s earnings per share has declined 9.1% over the past 30 days to 10 cents. This is indicative of a decrease of 77.3% from the year-ago earnings of 44 cents per share. Revenues are expected to be $1.73 billion, down 16.3% year over year.

Weyerhaeuser Company Price and EPS Surprise

Weyerhaeuser Company Price and EPS Surprise

Weyerhaeuser Company price-eps-surprise | Weyerhaeuser Company Quote

Let’s See How Things are Shaping Up for This Announcement

Weyerhaeuser’s second-quarter earnings are likely to be affected by continuous deterioration in OSB and lumber prices. Despite focusing on operational excellence, which entails merchandising for value, harvest and transportation efficiency, and flexing harvest to capture seasonal and short-term opportunities, the company’s exposure to raw material price fluctuations is likely to dent profits in the to-be-reported quarter.

Also, important housing market indicators like new and existing home sales, building permits, as well as housing starts have been lagging, supposedly dampening the company’s second-quarter overall performance.

Although the company expects the Wood Products unit (accounting for 66.6% of first-quarter total net sales) to generate significantly higher earnings and adjusted EBITDA sequentially in the quarter to be reported, the metrics will likely be lower than the year-ago period. However, the sequential increase would primarily be backed by seasonally higher volumes and operating rates across its product lines.

Weyerhaeuser anticipates earnings and adjusted EBITDA from Timberlands, the second largest contributing segment, to be sequentially lower in the quarter to be reported.

In the West, the company anticipates export sales volumes, due to the timing of vessel sailings, to be partly offset by favorable domestic log sales realizations. In the North, it expects fee harvest volumes to decrease significantly due to spring break-up. While average Southern log sales realizations are likely to be in line with the first quarter, Western and Southern silviculture activity, as well as related costs are expected to increase seasonally.

For the Real Estate, Energy and Natural Resources segment, the company projects sequentially lower but annually higher earnings and adjusted EBITDA in the second quarter. The downside is mainly due to the timing of favorable Real Estate transactions.

Overall, the company has been highly focused on reducing costs by improving reliability, enhancing product margins and maximizing benefits from focused capital investment, which is a positive for the upcoming results.

What the Zacks Model Says

Our proven model does not conclusively show that Weyerhaeuser is likely to beat estimates in the to-be-reported quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -30.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Weyerhaeuser currently carries a Zacks Rank #4 (Sell). Notably, we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Worth a Look

Here are some stocks in the Zacks Construction sector, which according to our model have the right combination of elements to post an earnings beat in their respective quarters to be reported.

Vulcan Materials Company VMC has an Earnings ESP of +1.84% and a Zacks Rank #3.

KBR, Inc. KBR has an Earnings ESP of +1.86% and a Zacks Rank #2.

Toll Brothers, Inc. TOL has an Earnings ESP of +8.77% and carries a Zacks Rank #3.

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