Weyerhaeuser Company Quarterly Valuation – May 2015 $WY

500px-Weyerhaeuser.svgREITs often attract a great deal of investors because of their strong cash flows and dividends, and those investors often overlook other parts of the business, choosing to analyze the company under a different set of criteria than companies in other sectors.  This can create a problem in that it becomes difficult to compare a REIT to an industrial, which is fine if you use the typical top-down approach to stock selection; however, a top-down approach invites speculation in the fact that you are theorizing which sector will perform well going forward.  Benjamin Graham taught that we should avoid speculation as much as possible, which is why it is critical to develop a system for analyzing companies that will allow them to be compared across industries.  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 investment opportunity.  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 is a real estate investment trust (REIT). The Company is one of the private owners of timberlands. The Company owns or controls approximately 7 million acres of timberlands, in the United States and manages another 14 million acres under long-term licenses in Canada. It manages these timberlands on a sustainable basis in compliance with internationally recognized forestry standards. It is also manufactures wood and specialty cellulose fibers products, and it develops real estate, as a builder of single-family homes. The Company operates under business segments: Timberlands, Wood Products, Cellulose Fibers and Real Estate. The Company operates as a sustainable company and is listed on the Dow Jones World Sustainability Index. It focuses on increasing energy and resource efficiency, reducing greenhouse gas emissions, reducing water consumption, conserving natural resources, and offering products that meet human needs with superior sustainability attributes.

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 $32.47
MG Value $41.55
MG Opinion Fairly Valued
Value Based on 3% Growth $21.36
Value Based on 0% Growth $12.52
Market Implied Growth Rate 6.77%
Net Current Asset Value (NCAV) -$10.11
PEmg 22.04
Current Ratio 3.11
PB Ratio 3.41

Balance Sheet - March 2015

Current Assets $2,652,000,000
Current Liabilities $852,000,000
Total Debt $5,402,000,000
Total Assets $13,009,000,000
Intangible Assets $40,000,000
Total Liabilities $7,982,000,000
Outstanding Shares 527,400,000

Earnings Per Share

2015 (estimate) $0.90
2014 $3.18
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

Earnings Per Share – ModernGraham

2015 (estimate) $1.47
2014 $1.80
2013 $1.10
2012 $0.93
2011 $0.89
2010 $0.88

Dividend History


Weyerhaeuser Company is suitable for the Enterprising Investor but not for the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, and the high PEmg and PB ratios.  The Enterprising Investor is only concerned with the high level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with further research into the company.  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.89 in 2011 to an estimated $1.47 for 2015.  This level of growth supports the market’s implied estimate of 6.77% annual earnings growth over the next 7-10 years, leading the ModernGraham valuation model to return an estimate of intrinsic value falling within a margin of safety relative to the current price.

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 any company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia; this article is not affiliated with the company in any manner.

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