Between Plunging Prices, Chronic Oversupply, And Trade Tensions, Weyerhaeuser Has Had A Tough Time

The last year, and the last six months in particular, have been rough ones for Weyerhaeuser (WY) and other companies in the timber, lumber, OSB, and wood products space like Louisiana-Pacific (LPX), Norbord (OSB), Boise Cascade (BCC), and Canfor (OTCPK:CFPZF). Although I’d always expected lumber and OSB prices to correct down from above-trend levels, I didn’t expect the steep (approximately 60%) plunge in lumber and OSB prices over the past six months, nor the apparent topping out of housing starts below 1.5M. Add in trade and tariff issues with China and Canada, and the situation has gotten quite tough quite quickly.

As a company, Weyerhaeuser will be fine. The now-former CEO did a very good job of driving operational efficiency and I believe ongoing operational improvements are becoming a core part of the company’s culture. I also believe Weyerhaeuser’s high-quality timberlands will remain a solid store of value that can support healthy tax-advantaged dividend payments into the future. It will take time for the pricing pressures to work themselves out, but with the yield now over 6%, patient investors may want to start taking a look at this name.

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Between Plunging Prices, Chronic Oversupply, And Trade Tensions, Weyerhaeuser Has Had A Tough Time

West Fraser Sandwiched Between Healthy Markets And Trade Policy Uncertainties

After a tough decade, things have at last turned up for lumber company West Fraser (OTCPK:WFTBF) (WFT.TO) and its peers. Operating rates in North American have been in the vicinity of 90% and housing starts have been slowly grinding higher. What's more, the company's own constant focus on costs and self-improvement has positioned it to make the most of the upturn in demand.

The "but" is the uncertainty regarding trade policy between the U.S. and Canada. West Fraser is a Canadian company, and while it produces about 40% of its lumber in the U.S., that leaves another 60% vulnerable to potential tariffs. My base case is that the outcome of this trade dispute is not crippling to West Fraser, Canfor (OTC:CFPUF) (CFP.TO), or Interfor (OTC:IFSPF) (IFP.TO) (nor unfair to Weyerhaeuser (NYSE:WY)), and that West Fraser's shares are currently priced at a bit of a discount on the assumption that there's a continuing build toward 1.6M to 2.0M housing starts in 2019/2020.

While West Fraser's ADRs do have the dreaded "F," they do offer some liquidity. The Canadian shares are far more liquid, though, and most brokers facilitate trading on Canadian exchanges without too much difficulty.

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West Fraser Sandwiched Between Healthy Markets And Trade Policy Uncertainties

Seeking Alpha: Louisiana-Pacific Cleared For Take-Off, But The Flight Will Be Bumpy

Slow and steady may win the race, but it doesn't do a lot for stock valuations. The U.S. residential construction market has been improving, but you really wouldn't know that from looking at the performance of housing-related names like Mohawk (NYSE:MHK) and Armstrong (NYSE:AWI). Likewise, building material companies like Louisiana-Pacific (NYSE:LPX), Weyerhaeuser (NYSE:WY), Boise Cascade (NYSE:BCC) and Norbord (OTCPK:NBRXF) have been pretty weak since the middle of 2015.

I think Louisiana-Pacific remains what it has been for some time - a trading vehicle for playing market sentiment about the housing market. Housing starts could approach (or reach) 1.25M this year, and OSB pricing (North Central) has strengthened relative to last year. With no real OSB capacity additions on the way in 2016, industry utilization could move into the high 80%'s and that should be good for the sector. Likewise, LP is gaining traction with its SmartSide siding and views this as a growth opportunity. I have very little confidence in these shares as a long-term holding, but the shares should probably be trading in the high teens and could go into the $20s on more enthusiasm around the space.

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Louisiana-Pacific Cleared For Take-Off, But The Flight Will Be Bumpy

Seeking Alpha: Weyerhaeuser's Asset Quality Held Back By A Sluggish Recovery

Now that Weyerhaeuser's (NYSE:WY) transaction with TRI Pointe Homes (NYSE:TPH) and subsequent tender offer are done, it's time for attention to move back to the core operations - high-quality timberland, a sizable wood products operation, and a "larger than you might think" cellulose pulp business. Weyerhaeuser's timber and wood products are going to generate the lion's share of shareholder value going forward and the company is well-placed in terms of asset quality.

In the meantime, though, a sluggish housing recovery in the U.S. and some challenges in key Asian markets are keeping the company from reaching its full potential. Plum Creek (NYSE:PCL) arguably offers more upside to a stronger recovery in timberland value and timber demand, but Weyerhaeuser's proven superiority in timber-based value generation and leverage to growth in engineered products suggests a better risk-reward tradeoff.

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Weyerhaeuser's Asset Quality Held Back By A Sluggish Recovery

Seeking Alpha: Improving Housing And A Major Deal Make Louisiana-Pacific Much More Interesting

The housing recovery trade seems to have hit a bit of a snag recently, as even hot trades like Home Depot (HD) and Mohawk (MHK) have cooled a bit recently. With mortgage rates heading higher and new construction activity still not that strong relatively to long-term averages, timber, lumber, and wood products companies have gotten dinged. While I had already been planning to write on Louisiana-Pacific (LPX) and point out that it seemed as though the market was pricing in too much skepticism about the OSB, siding, and engineered wood markets, the company did a deal that only makes the story more interesting.

In buying Canada's Ainsworth Lumber (ANSBF.OB), Louisiana-Pacific is not only adding capacity ahead of increased demand, but it is also improving its sales/margin mix, adding an Asian export business, and perhaps helping to quell fears that the industry will act irresponsibly with respect to capacity restarts/additions. While I'm actually surprised at how undervalued Louisiana-Pacific appears to be, it looks like there could be room here for 20% to 40% appreciation even after the strong positive reaction to the Ainsworth deal.

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Improving Housing And A Major Deal Make Louisiana-Pacific Much More Interesting