Weyerhaeuser poised for timber turnaround

With millions of acres of timberland and a homebuilding operation, this REIT is ripe for a housing market recovery.

By TheStockAdvisors May 3, 2012 11:55AM
Image: Home under construction (© Paul Burns/Photodisc/Getty Images)By George Putnam, The Turnaround Letter

Launched in 1900 when Frederick Weyerhaeuser persuaded 15 investors to help him buy 900,000 acres of timberland in Washington State, Weyerhaeuser (WY) has grown into one of the largest forest products companies in the world.

After spinning off its paper business in 2006 and selling its packaging business in 2008, the company converted to a real estate investment trust (REIT) structure in 2010 to focus on managing its timberland and its core forest products businesses.

There are two principal reasons to own Weyerhaeuser. First, it is an attractive way to play timber as an asset. Second, it would benefit significantly from a rebound in the U.S. housing sector. 

Many savvy investors consider timber as a good, inflation-protected asset to own. With a number of uses -- lumber, paper, fiber and others -- there is likely to be good demand for timber for the foreseeable future. And unlike oil and minerals, it is a renewable asset, since the acreage can be replanted each time the trees are harvested.

Weyerhaeuser owns nearly six million acres of timberland and has licenses for nearly 14 million additional acres. The owned timberland is in two particularly desirable areas: the Pacific Northwest and the Southeastern U.S. It also owns 300,000 acres in Uruguay, and leases some timberland in China. 

With a long history in the timber business, Weyerhaeuser is considered to be a leader in extracting value from its properties, and it has strong relationships with major timber customers. The timberland also includes mineral rights that provide $40 to $60 million a year in additional revenue.

In addition to the timber operations, Weyerhaeuser has a couple of more direct connections to the housing sector. It produces lumber and lumber products used in homebuilding and remodeling. The company also has a homebuilding business of its own that constructs and markets new homes in seven Western and Mid-Atlantic states. It is among the top 20 builders of single family homes in the U.S.

The balance sheet looks reasonably solid with $950 million in cash and no significant debt maturities for several years. The stock currently has a 2.7% dividend yield, and management has committed to devote a significant portion of cash flow to maintaining, and eventually raising, the dividend.

We believe that Weyerhaeuser's timberland alone makes it a good diversifying investment for many portfolios. But what really attracts us to the stock is the gain potential from its exposure to a recovery in the U.S. housing sector.

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