Why Weyerhaeuser Earnings Could Soar Higher

Weyerhaeuser (NYSE: WY  ) will release its quarterly report on Friday, and given the recent strength in the housing market, investors are hoping that the provider of forest products will benefit from greater demand for construction materials for the homebuilding market. Yet even though Weyerhaeuser earnings growth looks almost assured, the stock hasn't reacted as favorably as shareholders would have hoped.

Weyerhaeuser is structured as a real-estate investment trust, giving investors a nice dividend tied to the company's results. With its combination of building materials and paper products, the REIT enjoys a business that features renewable resources to ensure perennial growth. Let's take an early look at what's been happening with Weyerhaeuser over the past quarter and what we're likely to see in its quarterly report.

Stats on Weyerhaeuser

Analyst EPS Estimate

$0.30

Change From Year-Ago EPS

233%

Revenue Estimate

$2.04 billion

Change From Year-Ago Revenue

14%

Earnings Beats in Past Four Quarters

3

Source: Yahoo! Finance.

How will Weyerhaeuser earnings fare this quarter?
In recent months, analysts have modestly reduced their views on Weyerhaeuser earnings, cutting their June-quarter estimates by a penny per share and their full year 2013 and 2014 calls by $0.02 per share. The stock has remained subdued in response, falling by 1% since mid-April.

High lumber prices are the key driver of earnings growth for Weyerhaeuser, and in recent years, price trends in the industry have been quite strong. Infestations of mountain pine beetles have consumed about 12% of forested land west of the Mississippi, and that pushed lumber prices to levels not seen since the housing boom in the mid-2000s. Weyerhaeuser rival Plum Creek Timber (NYSE: PCL  ) has benefited even more from the trend, because unlike Weyerhaeuser, much of Plum Creek's timberland is in areas not affected by the beetle. Nevertheless, Weyerhaeuser was able to triple its profits in the first quarter from the year-ago period, posting its best quarterly earnings in eight years.

During the second quarter, though, lumber prices plunged, with lumber futures falling from nearly $400 down below $300 before recovering somewhat in the past month. Futures prices don't always get reflected immediately in spot prices, so the impact on Weyerhaeuser earnings might not show up this quarter, but if prices remain lower, it'll take a lot more demand from homebuilders in order to make up for falling margins.

Weyerhaeuser hasn't hesitated, though, to make some smart strategic moves. Last month, the company agreed to pay $2.65 billion to buy the Longview Timber business from Brookfield Asset Management (NYSE: BAM  ) and Brookfield Infrastructure Partners (NYSE: BIP  ) . By selling, Brookfield will be able to reinvest proceeds into areas that are more consistent with its current focus. Meanwhile, Weyerhaeuser picks up timberland in the Pacific Northwest that has easy access to Asian export markets, letting it take further advantage of tight supply conditions caused by the mountain pine beetle's huge presence further north in British Columbia.

In addition, Weyerhaeuser is managing long-term risk. With its innovative climate-change research, the company hopes to get information to help it manage and protect water resources while tailoring tree planting to handle potentially drier growing seasons.

In the Weyerhaeuser earnings report, watch to see what role incoming CEO Doyle Simons plays in the call. With Simons coming from the paper industry, it'll be interesting to see whether he drives the company more toward paper products. With so much potential demand from building materials, though, it's hard to see Weyerhaeuser making major changes from its successful strategy thus far.

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