Weyerhaeuser Company (NYSE:WY)

CAPS Rating: 4 out of 5

An integrated forest products company, Weyerhaeuser grows and harvests trees, builds homes, and makes wood and paper products.

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Player Avatar Glycomix (< 20) Submitted: 4/13/2011 2:03:12 AM : Outperform Start Price: $20.88 WY Score: -6.50

Weyerhauser is a value. It currently costs $22.50 almost half of its $40 stock price just a year ago. Buying WY at that price have a high likelihood of producing a 62.4% cash return in a year when one adds a 2.6% dividend to the average $13.61/share in cash provided to shareholders for depreciation. Weyerhauser may be flush with new sales over the next year. It has the largest amount of goods exported to China by a US company. It may be positioned to get a large portion of the lumber and contractor material orders that will go to rebuild north-western Japan. It has many square miles of timber, and is one of the most profitable lumber and building-material producers in North America. In the past year, purchasing a share of WY may have produce an 80% return in as little as a month from dividend and WY’s cash payment to . According to Finviz, WY had a 19% profit margin for 2010. http://www.finviz.com/quote.ashx?t=WY&ty=c&ta=1&p=d Weyerhauser’s financial security seems to be excellent. Its latest balance sheet shows $2.5B in current assets (cash and investments) and only $1.07B in current liabilities: in other words Weyerhauser’s current debts are only 40% of its ready cash. It has $13.49B in total assets and only $5.06B in total debt. (It has an impressive income statement, shows a manageable level of debt on the balance sheet and an increasing levels of unlevered cash flow. http://www.google.com/finance?q=WY&fstype=ii    Weyerhauser has recovered despite the economic depression and destruction of the US building trades caused by the Congress' legislating that Fannie Mae and Freddie Mac must produce trillions of dollars of welfare mortgages: 50% are made to persons who make less than $21,000, and 15% to people who make less than $14,000. Some loans are made to people who rent apartments that were financed by Fannie or Freddie. To increase the pork that politicians get credit for, the Democrats increased the Fannie and Freddie’s mortgages so that 76% of all mortgages were welfare-mortgage. The world-wide crash occurred when foreign banks were informed that Fannie and Freddie were bankrupt on Sept 9, 2008. Even if excessive government borrowing produces an economic depression and hyperinflation, Weyerhauser is likely to survive because it is efficient and gets 33% of its income by exporting its products. Analysts don’t like WY. However, I’m not sure that the analysts understand the economics of Real-Estate Investment Trusts (REITS) and Master Limited Partnerships(MLPs);       Weyerhauser will continue paying even if the US becomes a financial quagmire because it is an exporter. It earned 28% of its income though exports in 2009 and 33% of its income though exports in 2010, and its ratios look good. It has price/book ratio of 2.62; its price/sales is 1.65 and its price to earnings growth is an amazing 1.06; Weyerhauser ‘s PE for the past 12 month is 5.6 and, at $22.50, its stock price is almost half of the $40 that it was about a year ago.    By law REITS like Weyerhauser MUST give 90% of their profits to stockholders. Stockholders of Weyerhauser will reap a portion of the profits regardless of skittishness about dividends . In an economic downturn, blue-chip companies stop giving dividends. Between 1906 and 1929, bank dividends ranged from 5.6% to 6.7%. However, the great depression stopped banks from paying dividends: Only 20% of US companies made a taxable profit between 1931 and 1934, and most of commercial banks had negative balances from 1930 until 1935. They didn’t restore dividends until 1936 and then it was 4% or less. (Dauer, EA [1944] http://www.nber.org/chapters/c1781.pdf ). No one can read the future. However, if the past year is any guide, owning Weyerhauser shares could be profitable: dividends and depreciation added together gave investors an 80% Weyerhauser’s 2010 net income as a percent of revenues was 19%. They have a 2.29 current ratio. On December 6, 2010, WY provides both a 1% dividend of 20 cents and $12.6572 in cash per share for depreciation of assets ($6,784M depreciation/ 535.18 M shares = $12.85/share)If you bought a share of WY in November at $16 just before the ex-post date, you would have a return of $12.81/$16.00 = 80.06%. Using the an average depreciation , the averaged depreciation per share of $13.64+ $0.40 dividend = $14.04. When $14.04 divided by the current price of $22.50 = .6240 or a 62.4% return.       Depreciation doesn’t have to be reported until the cost of the shares are recovered in depreciation. From that point the depreciation paid to the individual share-holder must be reported as income. the Turbotax Deluxe interview addresses this one has any concern about how to report the dividend and depreciation from a REIT on one’s taxes. One way to avoid paying taxes on the the depreciation is to leave broker instruction to buy whatever shares the depreciation and dividend will provide. However, if you later sell the stock, you have to keep track of the amount of dividend and depreciation that was applied to buy the stock to get an idea of how much of the appreciation of stock-price is due to dividend and how much is due to depreciation.     I have two concerns: (1) the difference in how much Finviz said that they owe and what the Dec. 2010 balance sheet says that Weyerhauser owes and (2) what happened to $10B in assets in the four years between Dec. 2007 and Dec 2010 Finviz reports that Weyerhauser has a (supposedly current) debt/equity ratio of 1.10. This usually means that they owe 110% of what their assets are worth. However, Weyerhauser’s yearly Dec 2010 balance sheet shows that its liabilities total only 40% of the size of their assets. Balance sheet changes in the past four years are confusing: the balance sheet shows a decrease in asset value of 44% ($10.37B) in four years: from $23.80B at the end of 2007 to $13.43B at the end of 2010. The difference in the balance sheets also shows a $7B decrease in debt. It’s possible that timber-and was sold to produce $7B to pay off debt. However, it’s difficult to tell where the $3.37B decrease in value went. How much of the difference is due to lower valuations for the remaining timber-land and how much of the value might be attributable to selling land at ‘bargain-basement’ prices? Weyerhauser’s biggest competition comes from International Paper in Nashville, and Canfor Corporation in British Columbia. Canfor Corp. experienced the same negative-income problems that Weyerhauser experienced in 2008 and 2009, except that Canfor’s building materials downturn started in 2007.

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