A Member of Pat McKeough’s Inner Circle recently asked for his advice on a lumber company that manages long-term timberland holdings and creates wood products.
Pat likes the prospects of rising revenues and earnings driven by a U.S. building boom and limited lumber supplies. However, he notes that sawmills have experienced staffing problems due to the COVID-19 pandemic.
Weyerhaeuser Co. (Symbol WY on New York; www.weyerhaeuser.com), is the world’s largest private owner of timberlands, with 12.4 million acres in the U.S. The company also manages holdings under long-term licences in Canada. All of that makes Weyerhaeuser one of the largest manufacturers of wood products in North America.
The company operates in three segments: Wood Products (71% of sales), Timberlands (22%), and Real Estate (7%).
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Its sales and profits vary from year to year along with demand and prices for lumber and other wood products. Weyerhaeuser’s revenue was $7.08 billion in 2015 and dropped to $6.27 billion in 2016. Sales then rose to $7.20 billion in 2017 and to $7.48 billion in 2018. They declined to $6.55 billion in 2019. Sales (and profits) dropped in 2019 mostly due to lower lumber prices caused by sluggish housing markets early in the year.
Earnings were $506.0 million ($0.89 a share) in 2015, before dropping to $487.2 million ($0.65 a share) in 2016. Profits then rose to $582.0 million ($0.77 a share) in 2017 and to $748.0 million ($0.99 a share) in 2018. Weyerhaeuser’s profits then fell to $285 million ($0.39 a share) in 2019.
As lumber prices surged to record highs last summer, the shares recovered all of what they lost earlier in the year. A do-it-yourself remodelling boom and stronger home building activity drove the rise.
The lumber unit price is now well above the price reached during a short-lived climb in 2018. That was when tariffs on Canadian lumber, wood-boring beetles and forest fires all worked to limit supply.
Inner Circle: Building boom should boost additional lumber demand
This time, the building boom that the pandemic set off spurred prices.
Builders were already in the midst of the strongest home-construction market since 2006 when pandemic lockdowns began in March 2020. Since then, they have been trying to catch up with demand fuelled by the low mortgage rates.
As well, Americans, stuck at home for months, have increasingly taken on remodelling projects, such as building decks. Most sawmills failed to anticipate that big surge in demand after the dramatic falloff in business early this spring.
Lumber prices fell in late February 2020 as the U.S. economy began to shut down in order to slow the spread of COVID-19. An estimated 40% of North American lumber production was curtailed in March and April as millions of people lost their jobs.
However, lumber prices have been rising ever since the April 2020 low. By July 2020, prices had returned to their pre-pandemic levels and have subsequently moved much higher to all-time highs.
Meanwhile, problems for mill owners have included staffing and adding shifts at their facilities in the U.S. South. The ramp-up in workers has been difficult because of rising COVID infection rates. It’s also challenging to predict how long the strong demand for lumber will last—the high current unemployment rate in the U.S. may eventually impact new-home sales.
Recommendation in Pat’s Inner Circle: Weyerhaeuser Co. is a hold.
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