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Solid Housing Activity Aids Weyerhaeuser (WY) Amid High Cost

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Weyerhaeuser Company (WY - Free Report) has been reaping benefits from solid U.S. housing industry, focus on operational excellence and shareholder-friendly moves. Also, impressive segmental performance, strong repair and remodel demand as well as a stable balance sheet position are encouraging.

Higher material, transportation and other costs, lumber market swings and lower pricing for smaller diameter sawlogs put pressure on its profitability during the second quarter. In the past three months, its shares have declined 7.7%, underperforming the Zacks Building Products - Wood industry’s 1.3% fall.

Nonetheless, the company has outperformed other industry players like PotlatchDeltic Corporation (PCH - Free Report) , Louisiana-Pacific Corporation (LPX - Free Report) and Boise Cascade Company (BCC - Free Report) in the said period.

This outperformance can be primarily attributed to Weyerhaeuser’s impressive year-over-year earnings and revenue performance.

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A Quick Glance at Q2 Results

Recently, the company posted strong second-quarter 2021 results, with both the top and bottom lines improving impressively on a year-over-year basis. The top line rallied 92.8% from the prior-year quarter. The bottom line increased more than 12 times from the year-ago adjusted figure of 11 cents per share. Adjusted EBITDA also increased a significant 307.5% year over year. The robust performance is reflective of improving housing market and R&R activity, which in turn led to improved demand during the period.

Factors Supporting Growth

Strong Housing Market & R&R Activities: Housing markets are blooming, owing to the lack of existing homes for sale and continuation of the low rate environment. Demand for housing and wood products has been improving significantly amid rapid lumber market swings. Apart from remarkable recovery in single-family housing construction, repair/remodel activity has also been robust, supported by do-it-yourself and professional activity. Greater-than-expected demand for home improvement products has also been benefiting the company.

Strategic OpEx Initiatives: Weyerhaeuser remains focused on operational excellence that includes merchandising for value, harvest and transportation efficiencies along with flexing harvest to capture seasonal and short-term opportunities. The company reaped approximately $100 million benefits, company-wide, owing to operational excellence improvements in 2020. This initiative led to more than $0.5 billion of company-wide margin improvement from 2014 through 2019.

For second-quarter 2021, it came up with its highest quarterly adjusted EBITDA on record, surpassing first quarter's record by 43%. For 2021, it expects another $50-$75 million of operational excellence improvement across businesses.

Solid Shareholders’ Moves & Healthy Balance Sheet: Weyerhaeuser has been rewarding shareholders through dividend payments over the past several years. The company paid nearly $255 million cash dividends in first-half 2021 and $381 million in 2020. The move is a reflection of its strong cash position and sound capital allocation policy.

The company’s cash and cash equivalents at second quarter-end were $1.78 billion, up from $495 million at 2020-end. Cash from operations for the quarter was $1.31 billion compared with $391 million in the year-ago period. This marked its highest quarterly operating cash flow on record. Weyerhaeuser used a major portion of this cash to strengthen the balance sheet by redeeming some of its 2023 debt maturities.

Major Concerns

Higher Costs, Lower Profits: Weyerhaeuser’s West location witnessed soft domestic sales realizations due to lower prices for smaller diameter logs in Oregon. Also, early arrival of warm summer weather compelled it to start the transition of salvage harvest operations into higher elevation tracks, which generally have lower productivity and higher operating costs. Meanwhile, in the South, container availability and increased freight rates continue to be a major headwind for the company.

The Wood business also experienced difficult transportation and resin availability. Additionally, production and sales volumes in the segment decreased modestly and unit manufacturing costs increased, primarily due to a planned extended maintenance outage to complete a capital project at its Elk in OSB mill.

The company’s margins during the quarter were under pressure owing to higher forestry and road costs. Higher raw material costs for oriented strand board web stock, resin and veneer along with fiber are pressing concerns. This apart, major lumber market swings have been concerning the company over the last several quarters.

Tepid Q3 Prospects: Owing to higher costs, lumber woes and pricing issues, Weyerhaeuser expects third-quarter 2021 earnings and adjusted EBITDA in the Timberland segment to be lower than the second quarter. In the West, it expects slightly lower fee harvest volumes, and seasonally higher forestry as well as road expenses. In the South, the company expects higher per unit log and haul costs.

Within the Wood Products segment, Weyerhaeuser predicts earnings and adjusted EBITDA to be significantly lower on a sequential basis. It also expects higher raw material costs.

The Zacks Consensus Estimates for third quarter earnings of 80 cents has moved 17.5% south over the past 30 days, reflecting analysts’ concern over the company’s profitability.

These tepid projections of this Zacks Rank #3 (Hold) company are compelling investors to hold the stock for a while despite robust fundamentals. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.