Is The Market Missing The Forest For The Trees At Weyerhaeuser?

Residential construction is healthy and the prices of building supplies like sawlogs, timber, and OSB are very healthy… and yet, Louisiana-Pacific (LPX) and Weyerhaeuser (WY) have had lousy runs in the stock market this year and over the last twelve months. While Canadian companies like Canfor (OTCPK:CFPZF) (CFP.TO), Norbord (OSB), and West Fraser (OTCPK:WFTBF) (WFT.TO) have all enjoyed good runs, Weyerhaeuser shares have gone nowhere fast.

Lagging price realizations in OSB and still-lagging recoveries in Southern sawlogs are issues, and perhaps Weyerhaeuser is lagging because it’s not the “pure play” on some of these hot assets that other names are, but I find it interesting that the stock hasn’t responded more enthusiastically to the spiking prices in many of its end-markets.

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Is The Market Missing The Forest For The Trees At Weyerhaeuser?

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

Underlying Value And Housing Growth Support Weyerhaeuser

Weyerhaeuser (NYSE:WY) is a good example of a stock where it can be challenging to nail down the fair value. Cash flow doesn't necessarily account for the underlying value of the timberland and can miss the cyclicality of the housing cycles, but sum-of-the-parts net asset valuations can require a lot of work to find reasonable inputs/comparables for timberland valuation. Be that as it may, I think Weyerhaeuser offers decent value today on the strength of its extensive timberland assets and the improvements the company has made not only toward streamlining and focusing the business, but also in improving operating margins in the manufacturing operations.

It's been a while since I've updated my coverage on this company, but I think $30 to $35 a share is a reasonable (albeit wide) range for Weyerhaeuser shares, with $35 as the "sweet spot" on the basis of my sum-of-the-parts valuation. A trade war with Canada over lumber is a looming issue, but one that shouldn't hurt Weyerhaeuser, and I like the company's leverage to increasing housing activity albeit with some caution on what would be a potential oversupply of lumber into the market in the coming years.

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Underlying Value And Housing Growth Support Weyerhaeuser

Seeking Alpha: Plum Creek Timber Biding Its Time

Maybe the nicest thing I can say about Plum Creek Timber (NYSE:PCL) since my last update is that investors in this timberland REIT fared better than those invested in Weyerhaeuser (NYSE:WY), Potlatch (NASDAQ:PCH) or lumber/wood product producers like West Fraser (WFT.T) or Canfor (CFP.T). The basic underlying problem will be familiar to many investors - housing starts aren't recovering to the extent expected around the beginning of the year, Asian demand has been weaker than expected, and prices for Northwestern and Southern logs haven't improved as much as hoped.

If you've been interested in Plum Creek for some time, nothing has really changed. The bull thesis on Plum Creek centers around the idea that management can drive more value by intensive management of the timberland resources (better planting and harvesting decisions), sell higher-value properties, and leverage an eventual housing recovery. Bears can argue that Plum Creek doesn't have enough leverage to value-added manufacturing, that higher-value sales will disappoint, and that the slower/shallower housing recovery will limit price recovery.

I continue to believe that Plum Creek is likely undervalued on a long-term net asset value basis (which assumes "fair" prices well below prior peaks), but not so much so that this is a must-buy. I think this remains a credible stock for investors interested in income, but this is not the sort of situation where management excellence can neutralize an underwhelming operating environment.

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Plum Creek Timber Biding Its Time