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Will Weyerhaeuser Benefit From Housing Industry's Recovery?

Zacks Equity Research

Weyerhaeuser Company WY is well positioned to benefit from the strengthening U.S. housing industry, focus on operational excellence and shareholder-friendly moves.

This is evident from the company’s share price performance in the past month. Weyerhaeuser’s shares have gained 10.8%, outperforming its industry’s rally of 6.9% in the said period, backed by the above-mentioned tailwinds.

However, unfavorable average sales realizations for oriented strand board, domestic and export logs, as well as lower volumes are denting profits over the last few quarters.

Let’s delve deeper into the factors that substantiate Weyerhaeuser’s Zacks Rank #3 (Hold).

Catalysts Driving Growth

Rebounding Housing Industry: The housing industry has been showing signs of recovery since the beginning of 2019, post deflating second half of 2018. Steady job and wage growth, favorable builder sentiment, rapidly increasing household formation, along with a limited supply of inventory are strengthening the overall economy. Declining mortgage rates and moderate home prices have been adding to the bliss. Weyerhaeuser is anticipated to reap benefits from the current market conditions in the United States.

This leading U.S. forest product company predicts single-family housing starts to grow slightly below 1.3 million in 2019, primarily driven by increased activities during the year. Moreover, higher demand for repair and remodeling activities, as well as growing domestic and world economy are likely to drive profits.

Notably, for second-quarter 2019, it predicts significantly higher earnings and adjusted EBITDA on a sequential basis in the Wood Products segment, backed by seasonally increased volumes and operating rates across all the product lines.

Business Strategies to Boost Performance: 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.  

These initiatives yielded benefits of $44 million from Timberlands and Wood Products segments in 2018. In fact, it reaped more than $540 million benefits in the past five years (since the inception of the operational excellence program).

Particularly, the Timberlands segment (contributing 26.2% to first-quarter 2019 revenues) achieved $42 million of the $40-$50 million total targeted improvement. The uptick was attributable to the initiatives for reducing logging and hauling costs, along with improved log merchandizing and marketing to maximize revenues from every log it harvests.

It projects to gain $80-$100 million of additional excellence in 2019. This includes $40-$50 million from Timberlands and $40-$50 million from Wood Products

Shareholder-Friendly Moves: Weyerhaeuser keeps on rewarding its shareholders through dividend payments and share buybacks. In 2018, the company repaid nearly $1.4 billion in cash to its shareholders through dividends and share repurchases, and initiated a series of actions that reduced pension liabilities by more than $2 billion. The move is a reflection of the company’s strong cash position and sound capital allocation policy.

Major Concerns

Lower Profits, Tepid Near-Term Prospects: Weyerhaeuser’s first-quarter 2019 adjusted earnings decreased 69.4% from the year-ago figure, owing to unfavorable average sales realizations for oriented strand board, domestic and export logs, as well as lower volumes.

Both the company’s segments generated lower net sales during the quarter. Net sales in the Timberlands segment declined 12% from a year ago while that of the Wood Products unit fell 17.4%. The downside was primarily due to lower Western log sales realizations and volumes.

For second-quarter 2019, the company projects sequentially lower earnings and adjusted EBITDA in Timberlands and Real Estate, Energy and Natural Resources segments. This is partly due to seasonality surrounding forestry and road spending, along with the timing of its export shipments.

Prospects Signaling Downtrend: Earnings estimates for the current year have declined 3.1% over the past 30 days, depicting analysts’ concern surrounding the stock. Notably, the Zacks Consensus Estimate for 2019 earnings is currently pegged at 63 cents, indicating a fall of 46.6% from the year-ago reported figure. Also, sales are expected to decline 5.6% from a year ago to $7.06 billion.

Weyerhaeuser’s stretched valuation is a concern. Currently, its trailing five-year price to earnings (P/E) ratio is 28.02, which is higher than the industry’s 21.84. This implies that the stock is overvalued compared to peers. Per the VGM Score that identifies most attractive value, growth and momentum characteristics, Weyerhaeuser has a Score of F, indicating that the stock is most likely to underperform.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector are NVR, Inc. NVR, PulteGroup, Inc. PHM and Taylor Morrison Home Corporation TMHC, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVR, PulteGroup and Taylor Morrison have a three- to five-year earnings growth rate of 10.7%, 6.8% and 7.6%, respectively.

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