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Here's Why You Should Hold on to Weyerhaeuser (WY) Stock Now

We issued an updated research report on Weyerhaeuser Company WY on Jan 2. Strengthening timber, land and forest products business as well as the company’s efforts to improve operational efficiency and provide healthy return to shareholders adds to its advantages. However, the growth momentum might get restricted by headwinds rising from international exposure, global uncertainties and rising costs and debts.

Weyerhaeuser currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $26.6 billion.

Below we briefly discuss the company’s potential growth drivers and possible headwinds.

Factors Favoring Weyerhaeuser

Strategic Initiatives Drive Growth Opportunities: Over time, Weyerhaeuser has undertaken some strategic decisions to help it concentrate on its core timber, land and forest products business. In this regard, divestment of liquid packaging board business, printing papers company (North Pacific Paper Company) and Cellulose Fibers pulp mills in 2016 are worth mentioning. Also, the company continued with its efforts in 2017, having divested its timberlands and manufacturing operations in Uruguay to a consortium led by BTG Pactual's Timberland Investment Group in September. Also, the company sold its 21% equity interest in Twin Creeks Timber in October.

In addition, Weyerhaeuser’s merger with Plum Creek Timber has enabled it to leverage benefits from the gradually improving housing market in the United States. Housing starts in the country are expected to be roughly 1.2 million in 2017.

Attractive Shareholders’ Return: Weyerhaeuser has a sound track record of rewarding its shareholders through lucrative dividend payments. Notably, the company paid dividends of $699 million in the first nine months of 2017, of which roughly $233 million was distributed in the third quarter. In November, the company gifted its shareholders a 3.2% hike in the quarterly dividend rate.

We believe such disbursements are reflective of its strong cash position and capital allocation policy. In the long run, the company aims to achieve dividend payout of up to 75% of funds available for distribution.

Operational Excellence & Impressive Guidance: We believe that Weyerhaeuser’s ongoing operational initiatives are anticipated to support its results in 2017 (results not yet released). It aims to reap a benefit of $40-$50 million in the Timberlands segment, driven by these initiatives. Benefits of $55-$75 million are expected in the Wood Products segment, including improvement of $20-$25 million in oriented strand board, $20-$25 million in lumber, $10-$15 million in engineered wood products and $5-$10 million in distribution.

Weyerhaeuser anticipates sequentially higher earnings and adjusted earnings before interest, tax, depreciation and amortization from the Timberland segment. Likewise, results in the Real Estate, Energy and Natural Resources segments are predicted to improve sequentially. Also, the company anticipates spending approximately $300 million as capital expenditure for the Wood Products segment while $135 million has been allocated for the Timberlands segment.

Factors Working Against Weyerhaeuser

Poor Share Price Performance & Valuation: In the last three months, Weyerhaeuser’s shares have yielded 3.3% return, underperforming 5.6% growth of the industry.

Also, on a P/E (TTM) basis, Weyerhaeuser looks overvalued compared with the industry with respective tallies of 36x and 28.9x in the last three-month period. This makes us cautious on the stock.

Increasing Costs and Huge Debt Levels: Weyerhaeuser is suffering from the risks of escalated costs and expenses. In the first nine months of 2017, the company’s cost of sales increased 7.6% year over year. We believe, if unchecked, rising costs and expenses can hurt its margins in the quarters ahead.

Also, a high-debt level can lead to heightened financial obligations, posing serious threats to the company’s financial health. Exiting the third quarter, its long-term debt was approximately $5.9 billion.

Challenges Arising From Global Uncertainties: Weyerhaeuser’s businesses are highly dependent on the housing market in the United States. Lower level of housing activities and difficult financial conditions in the home country as well as other countries where the company operates will adversely hurt its sales, earnings and cash flow.

In addition, business expansion in foreign nations has exposed Weyerhaeuser to risks arising from adverse movements in foreign currencies and geo-political issues.

Earnings Estimates & Stocks to Consider

Weyerhaeuser’s earnings estimates for 2017 (results not yet released) and 2018 improved in the last 60 days. Currently, the Zacks Consensus Estimate is pegged at $1.20 for 2017 and $1.31 for 2018, representing growth of 2.6% and 0.8% from their respective tallies 60 days ago.

Some stocks worth considering in the industry are Boise Cascade, L.L.C. BCC, Rayonier Inc. RYN and Potlatch Corporation PCH. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Boise Cascade’s earnings for 2017 and 2018 improved in the last 60 days. Also, the company pulled off an average positive earnings surprise of 116.28% in the last four quarters.

Rayonier’s earnings estimates for 2017 and 2018 improved in the last 60 days. The company delivered better-than-expected earnings in three of the last four quarters, with an average positive surprise of 96.01%.

Potlatch Corporation’s financial performance was impressive, with an average positive earnings surprise of 43.58% in the last four quarters. Also, earnings estimates for 2017 and 2018 were revised upward over the last 60 days.

Zacks Editor-in-Chief Goes "All In" on This Stock

Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.

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Weyerhaeuser Company (WY): Free Stock Analysis Report
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