Weyerhaeuser: Built on a Strong Foundation
- The company appointed Doyle Simons as its new president and CEO. The 49-year-old was the chief executive of Temple-Inland, a maker of packaging and building materials, from 2008 until the company was taken over by the International Paper Company (NYSE: IP) in February 2012. He replaces the retiring Dan Fulton, who took the helm in January 2008 and steered Weyerhaeuser through its recovery from the recession.
- Weyerhaeuser also announced that it has agreed to buy Longview Timber LLC from affiliates of Brookfield Asset Management (NYSE: BAM) for $2.65 billion, including the assumption of debt. Longview adds 645,000 acres of timberland in the Pacific Northwest, bringing Weyerhaeuser’s total landholdings in that area to 2.6 million acres (more on that below). The company’s landholdings now total 6.6 million acres in the U.S. It will pay for the purchase with a mix of debt and equity.
In addition, the company will raise its quarterly dividend to $0.22 a share from $0.20 with the September 2013 payment, after the deal has closed. That followed an 18% dividend hike, from $0.17 to $0.20, announced on April 11 and payable on May 31. The stock now yields 2.75%.
- Finally, Weyerhaeuser said it is considering strategic alternatives for its real estate subsidiary, WRECO, including a merger, sale or a spinoff. It may also decide to continue operating WRECO, which is among the 20 largest homebuilders in the U.S. WRECO supplied about 14% of Weyerhaeuser’s 2012 revenue.
The company, which traces its roots back to 1900, operates through four divisions. Along with the real estate business, these include wood products, which produces lumber, joists and oriented strand board (for walls and floors) and supplied 40% of the company’s 2012 sales; cellulose fibers (24% of 2012 sales), which makes materials for products ranging from toothpaste to bandages and diapers; and timberlands (23% of revenue).
As Ben Shepherd, chief investment strategist for our Global Investment Strategist newsletter, pointed out in a March 20 article, the company has undergone a massive restructuring since the recession sent its shares down to a low of $19 from a pre-crisis high of above $60. These moves included selling its paper and corrugated packaging business and converting itself into a real estate investment trust (REIT) in 2010.
In all, the company’s head count has gone from 46,700 five years ago to just 14,250 today, according to the Seattle Times.
Under the REIT structure, the company must pay out 90% of its taxable income to investors in the form of dividends, which are then taxed in their hands. However, the change cut Weyerhaeuser’s tax rate from 35% to zero, putting it on a level playing field with other lumber firms that operate as REITs, including Plum Creek Timber (NYSE: PCL), the No. 2 lumber stock by market cap, which converted to a REIT in 1999. The conversion took effect on January 1, 2010.
Long-Term Lumber Demand Looks Solid
Lumber was the top-performing commodity in 2012, rising 38% thanks to the improving health of the U.S. housing market and rising demand from China.
But so far, 2013 has been a rocky year for lumber: after soaring to a 9.5-year high of over $400 per thousand board feet in April, it plummeted to a seven-month low of $277.40 on May 29. Recent tornadoes in Oklahoma gave prices a bit of a lift, but they then retreated to today’s level of around $283.00.
Seasonal factors played a significant role in lumber’s recent swoon. For example, the cool, wet spring meant a later start to the construction season in the U.S. Meanwhile, the price spike earlier in the year prompted China to cut its imports from North America and search for cheaper wood elsewhere.
Over the longer term, however, lumber’s outlook remains positive. RBC analyst Dina Ignjatovic, for example, is forecasting a 30% price increase by the end of 2014, based on accelerating U.S. housing starts, which are rising at about double the pace they were in the wake of the financial crisis. She also sees continued strong demand from China.
“All told, we forecast lumber prices to bottom out in June before resuming an upward trend throughout the remainder of our forecast period as the market tightens,” she recently told Canada’s Globe and Mail newspaper.
Weyerhaeuser Dominates the Pacific Northwest
Weyerhaeuser is well-positioned to profit as more homes go up in both Asia and its own backyard.
“The company controls about 6 million acres of timber forest, with about a third of its holdings located in the extremely productive Pacific Northwest region of the U.S., which primarily produces Douglas fir,” wrote Shepherd. “The remaining two-thirds mostly consist of pine producing forests in the southern U.S., with about 300,000 acres of pine and eucalyptus property in Uruguay.”
“The Pacific Northwest is the most productive timberland in the U.S., thanks to its cool, damp climate and typically abundant rainfall,” he added. “The Douglas fir that dominates the region is also a much higher value wood than the pine typically harvested in other parts of the country… This location also leaves it well placed to pick up the supply slack created by lower production caps in Canada, which is typically a key Chinese supplier.”
Even better, about two-thirds of the timber on the lands Weyerhaeuser acquired in the Longview deal is Douglas fir.
Housing Rebound Helps Fuel Profits
In the first quarter of 2013, Weyerhaeuser earned $144 million, or $0.26 a share (excluding special items), up sharply from $9 million, or $0.02, a year earlier. Sales jumped to $1.95 billion from $1.49 billion. The latest results topped the consensus forecast of $0.22 a share in profits on sales of $1.87 billion. The company saw strong demand for its timber and wood products, and its average realized lumber prices rose 20% from the fourth quarter. Oriented strand board prices gained 24%.
Bottom line: A leaner Weyerhaeuser, with its high-quality, perfectly located timberlands, is in a strong position to profit from accelerating economic growth in both China and the U.S. The rising dividend adds further appeal.