Morningstar | Weyerhaeuser's Results Soften Considerably on Rock-Bottom Wood Product Prices. See Updated Analyst Note from 03 Feb 2019
While results out of Weyerhaeuser's timber and real estate segments largely matched our expectations, the rapid decline in wood product prices eclipsed our bearish expectations for the end of 2018. Lumber prices fell nearly 25% from the third to fourth quarter, while OSB prices fell nearly 30%. This severely reduced segment adjusted EBITDA sequentially to $66 million from $250 million in the third quarter. The falling prices are due to the supply response following the run up in prices early in 2018. New capacity in the U.S. South has weighed on prices. However, we think prices will recover from recent lows in 2019. Canadian producers have cut supply for the upcoming spring, and we expect many smaller mills have too. Prices will also be aided by increased U.S. homebuilding in 2019. However, we've reduced our near-term profit outlook for the segment, leading us to decrease our fair value to $22 per share from $22.50 for no-moat Weyerhaeuser.Timber prices were mixed in quarter, down in the Northwest and up in the Southeast. We think timber pricing will improve modestly in 2019, primarily due to increased saw-log consumption in the U.S. South from rising lumber mill capacity. However, guidance of 38 million fee harvest tons is a small volume decline versus 2018, driving a decline in adjusted segment EBITDA. Management has guided to flat 2019 adjusted EBITDA of $260 million based primarily on higher and better use land sales.
We continue to view shares of Weyerhaeuser as overvalued, given our below-consensus log price forecasts in the U.S. South. Following a decade of soft lumber demand, forests in the South remain remarkably well stocked. We believe it will take the better part of the coming decade for the excess supply to be soaked up, which will then provide support for higher timber prices. This is despite our above-consensus housing and lumber demand forecast. We believe the market is over-eager to assume a prompt recovery in log prices in the U.S. South.
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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