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Morningstar | Weakening Prices Weigh on Weyerhaeuser's Margins; Mildly Reducing Our Fair Value Estimate. See Updated Analyst Note from 29 Oct 2018

Weyerhaeuser's third-quarter results were decent, given falling wood product prices and hurricane related downtime in the Southeast. Consolidated adjusted EBITDA fell roughly 21% versus the second quarter, to $505 million. This was despite fairly high timberland sales of almost 62,000 acres, mostly located in Montana. We've modestly trimmed some of our production estimates for the Timberlands and Wood Products segments, decreasing our fair value estimate to $22.50 per share from $23. Our no-moat rating remains unchanged.

Timberland adjusted segment EBITDA dipped 24% versus the third quarter to $206 million, due primarily to lower prices, combined with weaker volumes particularly in the U.S. South. We agree with management's fairly bearish outlook for the fourth quarter. While we remain optimistic that homebuilding will support demand for wood products over the coming decade, the threat of Chinese tariffs on log imports and pockets of weakness in the U.S. housing market will be challenging in the near term.

The Wood Products segment also faced contracting sales and margins. Lumber and panel prices both plunged from practically all-time-highs in the second quarter, bringing segment adjusted EBITDA margins down to 19% from 25%. We think margins are likely to fall in 2019 versus 2018 as Weyerhaeuser laps the first half of the year, when pricing was extremely strong. While the company's assets are very low cost and run at high operating rates during most market conditions, we think EBITDA margins will remain in the high-teens for the foreseeable future.

Despite Weyerhaeuser's recent share price declines, we think the shares still look expensive, given our bearish view for timber prices in the U.S. South. Just over two thirds of Weyerhaeuser's timber tonnage comes from the region, which remains exceedingly well stocked with timber. In our estimation, even as lumber production increases in the region, it will take more than a decade to eliminate today's oversupply.