As a lumber and homebuilding operation, Weyerhaeuser (NYSE:WY) has been hit with a double whammy of falling home sales and slumping demand for construction materials. But a company makeover, combined with timber-related tax relief anticipated in 2008, might entice investors to put down some green on the stock.

Weyerhaeuser's third-quarter results show that sales were off 9% overall, with double-digit drops in three of five business segments. For wood products, the biggest group, sales dropped 24%, while revenue from the real estate and homebuilding segment was down 20%. Small gains in the packaging segment and timber division weren't enough to offset those losses.

So the weakness from earlier in the year continued. Overall, year-to-date sales are off 11%, with some segments putting in an even worse showing. Earnings for the quarter came to $0.47 per share, down from $0.91 per share a year earlier, and would have been worse without a share buyback.

Here comes the sun?
But Weyerhaeuser remains optimistic, and it may have a trick up its sleeve. Earlier this year, the stock jumped to greater than $85 on rumors that the company would turn itself into a real estate investment trust. REITs enjoy tax advantages over corporations. Timber companies organized as REITs pay no corporate income tax, as long as they pay out at least 90% of their income to shareholders. That would help Weyerhaeuser against its international rivals, which already receive better tax treatment for their timber operations. Weyerhaeuser has named a REIT executive to its board, according to BusinessWeek, which suggests that the makeover may be coming soon.

Weyerhaeuser is also pushing something called the TREE Act (Timber Revitalization and Economic Enhancement -- aren't you glad you asked?), which management says should pass Congress in 2008. The TREE Act would make tax treatment more favorable for all timber companies, and make rules for choosing REIT status more compatible with timber operations.

Weyerhaeuser would not be the industry's first company to choose the REIT option. Potlatch (NYSE:PCH) reorganized in 2006 after being pressured by Franklin Resources (NYSE:BEN), a major shareholder. Others, like International Paper (NYSE:IP), have sold off their timberlands to existing REITs such as Plum Creek Timber (NYSE:PCL) and Rayonier (NYSE:RYN).

Better tax treatment, which would put more green into the hands of investors, would certainly brighten Weyerhaeuser's outlook -- and it could make the stock more attractive, too.

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