“We’ve owned Applied Materials (AMAT) and AVX (AVX) in our portfolios for years. These are great companies that quite frankly no one cares about. Or at least the market place is not paying anywhere near the types of premiums that these high-growth earners are going to potentially get,” he said.
His favorite is a long-term play on the housing sector, Weyerhaeuser (WY).
Weyerhaeuser makes paper and pulp, is the world’s largest timberland owner in the private sector, and is the second largest owner of timberland in the US, with more than 7 million acres. It owns and manages several million acres of forest in China and has planted 324,030 acres of forest on former grassland in Uruguay.
The company consists of four divisions: timberlands, wood products (used in building homes and other structures), pulp and paper, and real estate (builds homes and develops land). The materials produced in these divisions go into a wide array of products.
Third Avenue's David Barse believes Weyerhaeuser has a strong balance sheet and is trading at a discount to intrinsic value. Aside from a plunge during the housing crisis over almost $2 billion, the balance sheet is strong and improving. It generated cash flow of $671 million in 2010, up from a loss of $401 million in 2009.
Its long-term debt and liabilities of $8.8 billion are at their lowest level in a decade, and its balance sheet shows cash of $1.5 billion – also strong compared to previous years.
However, in a 2010 company review of its progress toward its goals, one of the few areas in which it rated itself as “below” was its performance in continually improving shareholder return, due to return on net assets and competitive performance. The company had a negative return on net assets of 8.9% in 2009 and a return of 5.9% in 2010.
The company decided in 2010 to reward shareholders by converting to a REIT which will allow it to more fully develop its timberlands, its most important asset. With all of its timber holdings, building products and home building endeavors, the company is poised to benefit greatly from a housing market recovery, depending on when that begins.
There are some rays of light on the horizon for home building. Privately-owned housing starts in June rose 16.7% over June 2010 and 14% higher than the revised May estimate. To put this in context, the number of housing starts is 31% higher than in April 2009, the lowest point since 1959, and down about 73% from the peak in 2006.
Weyerhaeuser’s earnings from home building increased already due to more home sales and higher margins in the fourth quarter. There were 21 percent more home sales in the third quarter 2011 compared to the same quarter the previous year.
Weyerhaeuser stock is up 13% year to date and down 40% over the last year. It trades for $21.38 as of Tuesday. Weyerhaeuser Co. has a market cap of $11.51 billion; its shares were traded at around $21.38 with a P/E ratio of 32.9 and P/S ratio of 1.8. The dividend yield of Weyerhaeuser Co. stocks is 2.8%.