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We recently downgraded Weyerhaeuser Company (WY - Analyst Report) from Outperform to a Neutral recommendation, anticipating that the company will perform in line with the broader market.

Why the Downgrade?

Weyerhaeuser is a well renowned forest products company with a huge timberland asset. It serves a diverse clientele spread across the U.S., Canada, Japan, Europe, and other regions. The company currently provides a solid year-to-date return of 33%.  

Over time, the company has solidified its timberland assets and is all set to further expand with the addition of Longview Timber LLC to its portfolio. The company’s total ownership of the U.S. timberlands post the acquisition will likely reach 6.6 million acres.  

Also, serious efforts are being made to improve operating efficiencies and reduce costs. To meet the end, non-performing assets are being disposed of to free resources for more productive use. Weyerhaeuser anticipates generating sequentially higher earnings from disposition of non-strategic timberlands in the second quarter. Of late, the company has initiated search for suitable alternatives for its homebuilding and real estate company, WRECO.

Apart from these, the recent increase of 18% in quarterly dividend rate points toward the company’s healthy balance sheet and strong cash position. For 2013, management looks forward to better operating conditions as demand from major export destinations are expected to surge.

Despite all these positives, we have downgraded the recommendation on Weyerhaeuser to Neutral, presuming that these positives have already been discounted in the share price. This leaves little room for further expansion. Further, risks arising from stiff competition, exposure to currency translation and geopolitical issues cannot be completely ignored.

Other Stocks to Consider:

Weyerhaeuser currently has a market capitalization of $15.7 billion. Other stocks to watch out for in the industry are Louisiana-Pacific Corp. (LPX - Snapshot Report), Potlatch Corporation (PCH - Snapshot Report) and Rayonier Inc. (RYN - Snapshot Report).

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