Weyerhaeuser Company Quarterly Valuation – February 2015 $WY

500px-Weyerhaeuser.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – January 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Weyerhaeuser Company (WY) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Weyerhaeuser Company, formerly Weyerhaeuser Timber Company, is a forest products company. The Company is engaged in growing and harvesting trees, builds homes and making a range of forest products. The Company operates in five business segments: Timberlands, which include logs, timber, minerals, oil and gas and international wood products; Wood Products, which include softwood lumber, engineered lumber, structural panels and building materials distribution; Cellulose Fibers, which include pulp and liquid packaging board; Real Estate, which include real estate development, construction and sales, and Corporate and Other. In July 2014, In July 2014, TRI Pointe Homes, Inc. announced its Reverse Morris Trust transaction with Weyerhaeuser Company (Weyerhaeuser) has closed. The transaction resulted in the merger of TRI Pointe with Weyerhaeuser’s homebuilding subsidiary, Weyerhaeuser Real Estate Company.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $35.24
MG Value $20.65
MG Opinion Overvalued
Value Based on 3% Growth $16.81
Value Based on 0% Growth $9.85
Market Implied Growth Rate 10.95%
Net Current Asset Value (NCAV) -$8.53
PEmg 30.40
Current Ratio 3.15
PB Ratio 3.23

Balance Sheet – September 2014

Current Assets $3,012,000,000
Current Liabilities $957,000,000
Total Debt $5,402,000,000
Total Assets $13,440,000,000
Intangible Assets $40,000,000
Total Liabilities $7,584,000,000
Outstanding Shares 536,000,000

Earnings Per Share

2014 (estimate) $1.25
2013 $0.95
2012 $0.71
2011 $0.61
2010 $3.99
2009 -$0.96
2008 -$2.06
2007 $1.33
2006 $0.68
2005 $1.10
2004 $2.01

Earnings Per Share – ModernGraham

2014 (estimate) $1.16
2013 $1.10
2012 $0.93
2011 $0.89
2010 $0.88
2009 -$0.44

Dividend History

Conclusion:

Weyerhaeuser Company is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the insufficient earnings growth or stability over the last ten years as well as the high PEmg and PB ratios.  The Enterprising Investor is only concerned by the level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $0.88 in 2010 to only an estimated $1.16 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 10.95% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out previous ModernGraham valuations of Weyerhaeuser Company (WY) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Weyerhaeuser Company (WY)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Weyerhaeuser Company (WY) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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