It takes a long time to grow an oak tree. But once it's grown, you can harvest and sell it for thousands of board feet and thousands of dollars. Likewise, full-grown profits have been a long time coming at wood products company Weyerhaeuser (NYSE:WY), but they arrived in the third quarter by the truckload.
The company reported third-quarter and year-to-date revenue growth of 13% and 14%, respectively, in comparison to the year-ago periods. Per-share diluted profits for the same periods grew an incredible 562% and 425%. Now, those numbers aren't quite as good as they sound -- a lot of the quarter's profits arrived in the form of one-time benefits to earnings (a net of $0.83 per diluted share), and similar-one-time events depressed Weyerhauser's Q3 2003 earnings by $0.28. If you back out all of those one-time charges and expenses, Q3 2004's results would have been $1.62 and Q3 2003's would have been $0.65 -- still an increase of nearly 150%, impressive in its own right and far ahead of consensus analyst predictions.
From a free-cash-flow standpoint, too, Weyerhaeuser's not dropping any leaves. Year to date, the company has raked in about $1 billion in free cash flow, giving it a projected run rate of about $1.3 billion through the end of the year (excluding the results for its real estate and related assets division). It has also paid off about $1.5 billion in long-term debt and upped its cash and short-term investments by a little more than $1 billion more.
Put it all together and Weyerhaeuser's balance sheet and valuation have strengthened in tandem, but the company's debt remains an issue. Based on the above run rate, the company shows an enterprise value-to-free cash flow ratio of about 19. Ignore its $10 billion debt load and back out its $1.2 billion in cash, however, and its price-to-free cash flow ratio would be just 11.
Long story short, in an era of rising interest rates, a company as highly leveraged as Weyerhaeuser probably isn't the most prudent of investments -- amazing third quarter or not. Competitor Rayonier (NYSE:RYN) looks like a better bet, as it's both slightly more profitable and considerably less leveraged. And if interest rates continue to rise, Plum Creek Timber (NYSE:PCL) or Deltic Timber (NYSE:DEL) might be worth a look: Neither one is as profitable as Weyerhaeuser, but neither one bears its crushing debt load, either.
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Fool contributor Rich Smith owns no shares in any company mentioned here.
