Morningstar | While Weyerhaeuser's Shares Are Rallying, Fundamentals Remain Far Behind
At the end of 2018, Weyerhaeuser's shares plunged as investors appeared to worry that both timber and lumber prices could remain lower for longer. Share prices have since rebounded with the broader market to start 2019. However, as evidenced by Weyerhaeuser's first-quarter results, wood product market conditions remain tough. The U.S. South remains exceedingly well stocked with mature timber, which we expect to weigh on prevailing prices for years to come. The first quarter largely progressed as expected, and we maintain our $22 per share fair value estimate and no-moat rating.Timber segment results were fairly solid in the first quarter, with adjusted EBITDA rising slightly from the fourth quarter to $193 million. Higher timber prices in the U.S. North and U.S. South were more than offset by a continued decline in Western timber prices, which have been under pressure from a combination of mild U.S. homebuilding activity and fewer exports to Asia. Following numerous announcements to curtail western Canada lumber production, Western U.S. mills could ramp production for the region. We think this should support higher timber prices in Washington and Oregon later in 2019. However, we see only modest upside for segment EBITDA margins over the near term, given an abundance of timber after a decade of substantial forest growth. We believe current share prices reflect a more rapid rebound in timber prices than will be realized.
Lumber and panel conditions were challenging in the first quarter. Both lumber and panel prices were low relative to last year's levels, with U.S. homebuilding off to a slow start in the first quarter. Lumber production generated an EBITDA margin of 11%, with OSB generating an EBITDA margin of 12%. Both figures were well below the prior year's levels. We believe 2018 will be the high-water mark for lumber prices over the next decade, though we do see some upside from recent prices.
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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