Housing has been an interesting place for investors to dabble into in recent years. Housing starts have never fully recovered from the fallout of the global financial crisis of 2008/2009, but this has created a rather heated market. Recently, the market has been affected by the COVID-19 pandemic, with housing inventories in mid-September this year coming in 39% lower than they were just one year earlier. One company that’s already showing signs of benefiting from this market imbalance is Weyerhaeuser Company (WY), a provider of wood and wood products and services. Though the company recently has benefited from a boom in demand for its products, shares look anything but cheap and the firm’s historical performance leaves a great deal lacking.
Recent performance is encouraging
*Taken from St. Louis Federal Reserve Branch
As the data above illustrates, housing starts data has been improving ever since the US came out of the last financial crisis. Between that long-term trend and the recent shortage of inventory seen in the space, demand for certain wood products has risen. This can best be seen by looking at the third quarter results that Weyerhaeuser recently reported. Revenue in the latest quarter for the firm came in strong at $2.11 billion. This implies a year-over-year growth rate of 26.3% over the $1.67 billion seen the same time of 2019. Changes occurred all across the firm, but the bulk of the improvement came from two product categories: Structured lumber and oriented strand board. Structured lumber sales were a robust $819 million, up nearly double from the $487 million seen a year earlier. Oriented strand board sales, meanwhile, grew from $159 million in last year’s third quarter to $290 million today.
According to management, the single largest contributor to these increases was a jump in prices realized, not an increase in volume sold. This reflects supplier power that a company with an inflexible amount of inventory has in a market that’s also, in the short run, inflexible. When you consider what structured lumber and oriented strand board are both for, it makes sense that these are tied intricately to housing demand.
So far in 2020, for the first three quarters of it at least, the trend has been similar. Revenue of $5.47 billion is 9.2% higher than the $5.01 billion been the same time last year. Structured lumber sales soared 30.8% from $1.43 billion to $1.87 billion. Oriented strand board sales of $659 million, meanwhile, happen to be 38.7% above the $475 million seen in the first three quarters of 2019.
As you might expect, a rise in sales, particularly driven by higher prices being realized, would positively impact the bottom line of a capital-intensive business like Weyerhaeuser. During its latest quarter, the firm saw net income of $283 million, up from $99 million the same time last year. Its operating cash flow during the quarter was a robust $608 million, more than double the $292 million seen in the third quarter of 2019. For the first three quarters as a whole, profits of $505 million eclipsed the $62 million loss seen in 2019’s first nine months, while operating cash flow of $1.09 billion did the same to last year’s $674 million.
So far, 2020 is looking really good for Weyerhaeuser. In the short run, there’s no doubt that Weyerhaeuser has the potential to do well. If we assume that fourth quarter results this year at least match what was seen from the third quarter to the fourth quarter last year, and apply the firm’s market cap of $21 billion, then we get some interesting figures. The company’s forward price/earnings multiple for the year would be a high 42.8, but its price/operating cash flow multiple would be 17.4. That’s not horrible, but it’s far from an attractive value play.
More likely than not, though, in time, Weyerhaeuser will see itself revert back to historical results. This could put it anywhere from a reasonable prospect to a very pricey one. But in no case does the company look like a compelling play. For instance, from 2015 through 2019, the company’s net income ranged from a loss of $76 million last year to a gain of $1.01 billion in 2018, as revenue ranged from a low of $5.25 billion in 2015 to a high of $7.48 billion in 2018. Operating cash flow has been far more consistent, ranging from a low of $735 million to a high of $1.20 billion. Ignoring 2019 as an anomaly for earnings, the average net profit between 2015 and 2018 was $699.25 million. That implies a price/earnings multiple for the firm of 30. Its five-year average for operating cash flow was $1.02 billion for a multiple of 20.6. Its lowest multiple was 17.5.
What all of this illustrates is that, at best, Weyerhaeuser is more or less fairly valued. More likely than not, though, this cyclical business will remain cyclical, and when profits go down, investors will be hurt some. Shares have a long history of gyrating over time. In the past year, units traded as low as $13.10, while today they are at $28.48, which is just a hair from their 52-week high of $30.98. In the past five years, shares have traded as high as $37.54. But that was coming off a really strong 2017 and going into 2018 when results would also turn out to be really robust.
Weyerhaeuser seems like an interesting play for investors who want to be exposed to the housing space, but it really depends, a the end of the day, what investors want from it. If the goal is to jump on board a cyclical business, ride it a bit higher, bail, and then rinse and repeat, Weyerhaeuser seems to be approaching that peak but it could be a reasonable play nonetheless. If, instead, the goal is to actually be an investor and focus on the long run, there are definitely better prospects out in the market than Weyerhaeuser.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.