Two surprising areas of strength in the economy for more than a year have come from the Homebuilders and Construction industries. Against the backdrop of economic pressures from the pandemic, it’s natural to think that economically sensitive industries like Homebuilders, Construction, and others would see decreases in demand. The shift of corporate America to work-from-home models, however, combined with reduced consumer spending because of forced shutdowns of social gatherings and other traditional consumer activities, along with massive federal spending that included direct checks to taxpayers has actually contributed to continuing high demand for both new and existing homes in areas across the country, with the average price of homes seeing outsized increases throughout the first half of this year.
These reports also coincide with the performance of these industries at large; the iShares Home Construction ETF (ITB), for example, is more than 29% on a year-to-date basis, and has more than tripled in value from its bear market low last year. As a value investor, seeing that kind of impressive performance in an industry benchmark usually steers me away from looking for value in those stocks; but as is always the case, no matter what the industry or sector is doing, there are always exceptions to the rule.
Weyerhauser Company (WY) is an interesting example. If you’ve had to buy lumber for a home improvement project, you’ve probably acquired it from their Wood Products segment, which emphasizes the production and distribution of wood products. That, along with homebuilding in general, ties this company to the Construction and Homebuilders industries; however, this is a company whose primary focus is on the timberlands and forest acreage that makes all of its segments possible. That puts the company in the category of a Real Estate Investment Trust (REIT), a segment of the sector that tends to see a different kind attention from the market, especially from income seekers when interest rates from more traditional instruments like Treasury bonds and regular stock dividends remain low.
REIT’s are interesting because stocks in this segment tend to pay higher annual dividends than stocks in other industries. WY suspended their dividend earlier this year due to COVID concerns, but reinstated it (at a lower than previous rate) before the end of 2021. Of course, dividend yield alone shouldn’t be the only basis for any investment decision, especially if your plan is to hold onto the stock for any extended length of time. That means that diving in to the stock’s fundamental profile becomes very important. Another element that makes WY interesting is the fact that driven no doubt in part by trend of the Construction and Homebuilders industries to push to new recent highs, the company has also realized improving profitability and managed to maintain a healthy balance sheet while also still offering an interesting value proposition. The stock has faded off of its 52-week high a few months ago as concerns about the pace of real estate price increases, supply shortages for building materials and the decreasing affordability of even starter homes across the country has put investors a little bit on edge about the industry. Given WY’s strong fundamental profile, however, and an interesting value proposition, along with signs the stock’s price is starting to stabilize, the truth is this might be a smart stock to keep an eye on.
Fundamental and Value Profile
Weyerhaeuser Company is a timber, land and forest products company. As of December 31, 2016, the Company owned or controlled 13.1 million acres of timberlands, primarily in the United States, and manages additional timberlands under long-term licenses in Canada. The Company’s segments include Timberlands; Real Estate, Energy and Natural Resources (Real Estate & ENR), and Wood Products. The Timberlands segment’s offerings include logs, timber and recreational access via leases. The Real Estate & ENR segment includes sales of timberlands; rights to explore for and extract hard minerals, oil and gas production, and coal, and equity interests in its Real Estate Development Ventures. The Wood Products segment includes the manufacturing and distribution of wood products. The Wood Products segment is engaged in softwood lumber, engineered wood products, structural panels, medium density fiberboard and building materials distribution. WY’s current market cap is $25.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 1,455.55% (yeah, weird, but not a typo), while sales improved almost 93%. In the last quarter, earnings increased 50.55%, while sales grew by about 25.5%. WY’s margin profile has gotten stronger as the year has progressed; over the last twelve months, Net Income was 23.25% of Revenues, but increased to 32.7% in the last quarter.
Free Cash Flow: WY’s free cash flow is healthy and growing, at a little over $2.6 billion for the trailing twelve month period; that translates to a Free Cash Flow yield of about 10.34%. It is also noteworthy that this metric has increased in each quarter of the past year from a starting point in June of last year at about $983 million, and from around $550 million in mid-2019.
Debt to Equity: WY has a debt/equity ratio of .49, a low number that implies a conservative approach to leverage. WY’s balance sheet shows a little $1.77 billion in cash and liquid assets against $5.1 billion in long-term debt. While the proportion between the two is a bit high, their strengthening margin profile and improving free cash flow suggest that servicing their debt won’t be a problem.
Dividend: WY pays an annual dividend of $.68 per share, which translates to a yield of 2.0% at the stock’s current price. WY suspended its dividend after the first quarter of 2020 but reinstated it in December 2020 at 1/2 its pre-pandemic levels.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at $46.77 per share. That suggests that even with the stock’s increase this year, the stock remains undervalued, with about 36% upside from its current price. It is also worth noting that at the end of 2020, my analysis yielded a long-term target price for this stock at around $40 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the last year of market activity for WY. The red diagonal line traces the stock’s upward trend from a low at around $26.50 to its 52-week high in May at nearly $42 per share; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has been dropping off of that high as bearish momentum in the broad market strengthened into mid-June, pushing the stock a low at around $33.52 that has provided consistent support for the stock’s current consolidation pattern. Immediate resistance is around $35. A push above $35 will find next resistance at around $36 where the 38.2% retracement line rests, but a push above that level should see upside to about $39. A drop below $33.52 has next support at around $32 inline with the 61.8% retracement line, with additional downside to about $31 if bearish momentum increases.
Near-term Keys: With the stock’s strengthening Net Income, improving Free Cash Flow, solid and improving balance sheet, and reinstated dividend, I think WY is a very interesting example of a company whose price increases isn’t only driven by broad market sentiment but also by the recognition of investors in its improving fundamental profile. It is also interesting that despite the increase through the year, the stock’s latest drop has only made the value proposition more interesting. The stock’s consolidation pattern is also an encouraging sign that the probabilities, even on a short-term basis could be shifting back to the bullish side. That means that if you prefer to work with short-term trading strategies, a push above $36 would act as a strong signal to consider buying the stock or working with call options, with a profit target price at around $39. A drop below $33.52 doesn’t have a ton of downside, but it could be a signal to use next support between $32 and $31 as a target on a bearish trade, either with shorting the stock or buying put options so long as you’re willing to act quickly to claim profits and move on.