Morningstar | Weyerhaeuser's Performs Well in 2Q on Robust Wood Product Results
Weyerhaeuser's second-quarter results were consistent with our bright outlook for the company in 2018. A sequential decline in timberlands segment adjusted EBITDA was more than offset by a more than 30% improvement in wood products. Elevated lumber and panel prices supported substantial profit generation during the second quarter, but we warn investors that prices are likely to retreat during the back half of the year. Fewer supply chain bottlenecks will free up existing capacity to lift production levels, putting a damper on today's high prices. While our forecasts are generally unchanged, we've mildly increased Weyerhaeuser's fair value to $29.50 from $29 due to time value of money effects. Weyerhaeuser's no-moat rating is unchanged.Wood products segment performance was extremely strong during the quarter, with adjusted EBITDA margins in lumber rising to nearly 30%, and those in OSB nearing 50%. Total adjusted EBITDA rose to $385 million--up 35% versus the first quarter as product prices reached all-time-highs. Our outlook for the second half of 2018 and early 2019 is more bleak. A tough Canadian winter and rail transportation issues limited British Columbian wood product output early this year, but these constraints are easing. Prices have already started to decline week-to-week and we expect this to continue. In late-2019 and beyond, we expect pricing to rebound as strong demand for new homes in the U.S. drives increased lumber consumption.
Timberlands' segment adjusted EBITDA fell 10% to $240 million sequentially versus the first quarter. The decline was caused by a seasonal slowdown and disproportionately slower harvesting activity in the U.S. West where prices remain elevated. Timber prices have remained subdued in the U.S. South, as forests remain thick with mature timber. A steady stream of lumber projects announced throughout the region point to higher pricing over the coming years, and our outlook for the segment is unchanged.
For more on our U.S. Housing thesis and its impact on lumber companies, see our December 2017 Observer "Lumber Companies Poised to Profit as Millennials Form Households."
Weyerhaeuser is a real estate investment trust. The company's business segments are: Timberlands, which provides delivered logs (grade logs and fiber logs), timber, recreational leases and other products; Real Estate, Energy and Natural Resources (ENR), in which Real Estate sells timberland tracts for recreational, conservation, commercial or residential purposes, whereas ENR sells rights to explore, extract and sell construction aggregates (rock, sand and gravel), industrial materials and oil and natural gas; and Wood Products, which provides structural lumber, oriented strand board, wood products, other products, and complementary building products.
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