Running Scared … Into Profits
When the COVID-19 pandemic struck executives at Weyerhaeuser (NYSE: WY) were quick to react. The pandemic sparked an immediate and unknown dip in demand, in order to protect the company they went to drastic lengths. Not only did they decide to suspend the dividend, cut back on CAPEX and begin refinancing debt to longer maturities but they cut their own salaries. And good for them. Their actions have set this company up for a serious rebound in earnings they’d not have achieved otherwise.
The Second Quarter Wasn’t As Bad As Feared
Results in the second quarter were much better than analysts or even the company had expected. Revenue fell on a YOY and sequential basis but blew past consensus by 1300 basis points or 13%. Timberlands revenue, the company’s second-largest category, saw particular strength coming in a full 33% above target. And this is despite production cutbacks related to the aforementioned drastic cost-cutting measures. Wood products, the company’s largest segment by far, saw net revenue fall but only 2.2%.
Things are even better on the bottom line. The company’s cost-cutting measures delivered record-low cost performance and padded earnings. GAAP earnings of $0.10 and adjusted EPS of $0.11 both beat by a dime. Looking forward, Weyerhaeuser is expecting Q3 revenue and earnings to decline but there are a couple of offsetting factors investors should be aware of. First and foremost, the Q2 results are such that the FY consensus for 2020 has already been met. That means we’re going to see some serious upward revisions in the not-too-distance future.
Second, the demand for wood products is rising and underpinning prices. CEO Devin W. Stockfish says the QTD pricing for lumber products is well above the mid-point for the prior quarter.
“Weyerhaeuser expects third-quarter earnings and Adjusted EBITDA will be significantly higher than the second quarter. To date, third-quarter benchmark pricing for lumber and oriented strand board is significantly higher than the second-quarter average. The company also anticipates increased sales volumes across most product lines.”
A Speculation For Dividend Investors
When Weyerhaeuser suspended its dividend the move was temporary. Based on the company’s balance sheet, record low production cost, and outlook for earnings in the coming year it’s likely the distribution will be reinstated. If not now then soon, from an investment perspective, perhaps in the second half of the fiscal year. The previous payout was $1.36 or about 4.80% with the stock at $28.50.
From the balance sheet perspective, the company is well-capitalized with only a moderate amount of debt. The cash position by itself is enough to cover the distribution at prior rates and free-cash-flow is available. Over the course of the last quarter, the company was able to further bolster the balance sheet via paying down some of its debt and improving free-cash-flow.
"These operational efforts, in conjunction with improving market conditions and our prior actions to enhance financial flexibility, enabled us to generate solid cash flow, and strengthen our balance sheet ... We remain focused on operating safely and efficiently, effectively capitalizing on a full range of market conditions, and driving long-term value for our shareholders through disciplined, prudent capital allocation."
The Technical Outlook: Bullish With A Chance Of Breakout
Weyerhaeuser has been moving up nicely over the past few months despite the dividend suspension. Today’s news has the shares up another 2%-3% in premarket action and heading up toward resistance at the pre-COVID high. It looks certain the high, near $31.50, will be tested at least but a break out may depend on the dividend or outlook for its reinstatement. Positive news in that regard could easily spark a move to new highs. In that scenario, the next target is near $37.50 or about 25% upside from today’s price action.
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There are more than 500 brokerages and research houses that hire analysts to issue ratings and recommendations. Collectively, these brokerages and their analysts publish approximately 175,000 ratings each year. Every trading day, there are nearly 700 reports and recommendations that are released to the public. To say that it's difficult to separate the signal from the noise when interpreting this data would be an understatement.
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