Weyerhaeuser (NYSE:WY) is a well-capitalized US-based forest products company with high quality assets in the form of 7 million acres of timberland that form one of the most valuable privately owned timber portfolios. It also has a wood products business used in homebuilding and a cellulose fibers business with product used for absorbency in items such as paper towels.
A number of macro headwinds negatively impacted Weyerhaeuser’s common stock price for the quarter: a decline in demand from China which led to pricing declines for Pacific NW logs, continued weak US housing markets which negatively impacted the wood products business, and port strikes and maintenance outages which disrupted the cellulose fibers business. These shorter term concerns did lead to earnings per share cuts for 2015. Despite these near-term macro headwinds, Weyerhaeuser is, in our opinion, well-positioned to compound NAV at a double-digit rate over the longer-term. First, Weyerhaeuser’s timberlands inventory, i.e., trees, are hard assets that can continue to grow; those that aren’t used this year continue to grow and become more valuable the following year. Second, we expect Weyerhaeuser’s cash flow and earnings to materially improve as US home starts recover from the cyclical downturn to more normalized levels. Further, the company has enhanced its timberlands portfolio and divested non-core businesses, cut costs and repurchased shares. While the ultimate timing of a housing recovery is unclear, we believe Weyerhaeuser will benefit when it does. In the meantime, given a 4% dividend yield, we added to our position on weakness in the quarter. Continue Reading »