Sometimes the fundamental backstory for a stock is so compelling it can make a small earnings miss seem like an insignificant bump in the road. We saw this happen with Weyerhauser (WY -1.05%), which recently reported earnings per share results that came in below Wall Street analysts' consensus.
Despite the earnings miss reported on Jan. 29, the fundamental foundation for this real estate investment trust (REIT) is exceptionally strong, as the United States is dealing with a massive housing shortage. During its fourth-quarter earnings conference call, Weyerhauser laid out a compelling case for the company.
One of the biggest global owners of timberland
Weyerhauser is one of the biggest owners of private timberland globally. This REIT owns or manages over 25 million acres of timberland in the United States and Canada. The company also manufactures wood products, including structural lumber, oriented strand board, engineered wood, and other specialty products. Weyerhauser's end markets are primarily residential, light commercial, and industrial.
Weyerhaeuser recently reported full-year 2020 earnings of $797 million, or $1.07 a share on a fully diluted basis. Revenue rose 15% year over year to $7.5 billion. Margins increased as well; adjusted earnings before interest, taxes and depreciation, and amortization (EBITDA) rose 72% year over year to $2.2 billion. This was Weyerhauser's highest EBITDA in nearly 15 years.
What is going on? What caused the revenue spike? Higher lumber prices.
Lumber prices are on a tear
According to the trading data from the Chicago Mercantile Exchange, lumber prices have risen 127% over the past year to $940 per lumber contract. Part of the reason for the improved pricing was a severe fire season during the summer. However, housing demand remains strong. In fact, after a temporary seasonal decline in housing activity caused a pullback, lumber prices remain well above summer levels.
Building permits are at highest levels since the Great Recession
On the earnings conference call, Weyerhauser CEO Devin Stockfish gave some background on what the company is seeing in the housing market. Housing starts averaged 1.6 million units in the fourth quarter, an increase of 11% compared to the third quarter. Building permits hit the highest level since the Great Recession, totaling 1.7 million in December.
Stockfish looked forward into 2021 and laid out the bullish case:
As we progress into 2021, we expect numerous macroeconomic tailwinds will continue to drive favorable U.S. housing activity, including a post-COVID preference for larger single-family homes supported by ongoing work-from-home flexibility, mortgage interest rates near record lows, strong homebuilder confidence, record low inventory for existing home sales, demographic trends that support growing millennial homeownership while older adults are deciding to age in place, and the possibility of a federal tax credit for first-time homebuyers under the Biden administration.
While the outlook is certainly rosy, there are some potential headwinds, especially shortages of skilled construction labor. That said, lower interest rates are keeping mortgage rates low, which mitigates some of the effect of higher building materials prices, including lumber. The company forecasts housing starts of 1.45 million next year, which is only a 5% increase from 2020's total of 1.38 million. Given that building permits currently total 1.7 million, which is 17% above a year ago, that estimate may turn out to be conservative. Note that the stimulus bill envisions a $15,000 tax credit for first-time homebuyers.
Insatiable demand meets limited supply
The COVID-19 crisis accelerated a trend that was already in place: the preference of millennials to leave crowded urban environments for homes in the suburbs. Mass adoption of work-from-home employment arrangements makes the exurbs suddenly more attractive. At the same time, housing inventory is extremely tight. In its latest existing home sales report, the National Association of Realtors said that the current number of homes for sale represented about 1.9 months' worth of inventory, which is a record low. We have a case of extreme demand meeting a dearth of inventory. Given that home prices are soaring, builders should be busy for the next several years.
Weyerhauser is trading at about 20 times the expected 2021 EPS estimate of $1.74. This is certainly a favorable multiple given that earnings are expected to grow 35% compared to EPS of $1.29 in 2020, which excludes some one-time items. The stock also yields a dividend of 2%. The company will additionally pay an earnings-based special dividend in the beginning of 2022, which will boost the yield even further.
Weyerhauser is in the right markets at the right time and the stock is worth your further consideration.