by Aaron Levitt | January 29, 2013 9:23 am
Lumber prices, driven by the rebound in the U.S. housing market and expanding pulp sales, surged to new six-year highs back in 2012. Those same factors still are propelling the natural resource upward today, and analysts predict a new “super-cycle” for forest products is just beginning — making the boring forestry sector one of the best portfolio options for the longer-term.
Investors received conformation on just how strong the wind behind timber is late last week, when forestry giant Weyerhaeuser (NYSE:WY) reported earnings. The century-old producer of forest products (now a real estate investment trust) reported its highest revenue in more than four years.
Yet, the market didn’t even care. Correction: The market did care, it just didn’t care for what it saw, and actually sent Weyerhaeuser shares downward nearly 5% over the next two trading days.
While some might see WY’s drop as a bad sign, for longer-term investors, it’s a great chance to get in on the cheap.
On the surface, Weyerhaeuser reported great numbers. Fourth-quarter revenue rose nearly 25% to $2 billion — better than analyst estimates, and the company’s best reported revenue since Q3 2008. It also reported a profit of 26 cents per share — again, well ahead of the consensus.
So what gives?
Well, Wall Street might have been disappointed by how WY reached those numbers.
According to several Wall Street analysts, the bulk of Weyerhaeuser’s earnings beat was generated by lot and land sales in the real estate segment. More than $65 million worth of the firm’s Q4 earnings ($143 million) was due to so-called “non-strategic” land sales. Typically, the timber REITs will sell off acreage when the land doesn’t fit into their plans, or when transportation costs for carrying timber to sawmills is too high. The amount of these land sales can vary from quarter to quarter; for Weyerhaeuser, this quarter’s sales were unusually high.
Back out the non-strategic land sales, and many analysts postulate that WY’s numbers were just OK.
I think those numbers were better than just OK — and there’s still plenty to be bullish about when it comes to Weyerhaeuser’s latest numbers and future prospects.
First, the company expects that significantly higher current-quarter earnings in its wood products business. Weyerhaeuser’s largest operating segment sells lumber and structural panels to residential and light commercial markets — i.e. all the things needed to build houses. While that segment had disappointed analysts this quarter, net revenue still showed growth and was still $832 million. More importantly, with housing starts rising 12.1% last month and permits for future home construction hitting four-year-plus highs, there’s no reason to believe that sector won’t continue to grow revenue in the upcoming quarters.
That doesn’t even take into account rising international demand in places like China or Japan. Growing Chinese demand wasn’t part of the equation the last time the U.S. housing market was rising.
Secondly, as we’ve pointed out before, investing in timberland is a game of patience. Disappointing lumber sales means that Weyerhaeuser basically withheld harvesting logs. That means the trees are still growing and will yield more fruit down the road. Weyerhaeuser owns more than 6 million acres in the U.S. and manages another 14 million acres in Canada. On average, a forest grows by 7% each year; that’s a lot of extra profit coming down the pipeline.
Finally, the non-strategic sales shouldn’t be viewed as a negative. Timberland values continue to rise exponentially as more institutional and retail investors have realized the sector’s inflation-fighting and diversification potential. Why not sell something that doesn’t fit your long-term strategic goals while the iron is hot?
So while the quarter was just OK by Wall Street’s measures, it still represented a move in the right direction. More importantly, the longer-term looks bright for Weyerhaeuser … and given just how long-lived timberland assets are, that’s exactly the time horizon investors should be eyeballing.
Naturally, Wall Street is short-sighted. A deluge of analyst downgrades began pouring in as the stock headed lower. To me, that smells like opportunity.
With their purchase, investors are gaining access to one of the largest timberland owners in country — one whose cash flows (a measure of REIT health) continues to remain brisk. Announced in the earnings release was the notion that the firm plans on raising its dividend — which currently yields 2.2% — in the new year. The company spent about $92 million on dividend payments in quarter, but with a cash balance of almost $900 million, there’s plenty of room to raise it. Not to mention any increase in lumber sales will boost those cash flows even further.
Sounds “OK” to me.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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