Weyerhaeuser WY is well-poised from solid demand from export markets, forest carbon pilot project and consistent dividend payout. Shares of Weyerhaeuser have lost 17.4% year to date, outperforming the industry’s 27.1% decline. Earnings estimates have risen in the past few weeks, suggesting bullish sentiments surrounding the company’s prospects. The Zacks Consensus Estimate for 2022 earnings has increased 1% and the same for the next year has risen 5.8% over the past 30 days. However, ongoing supply-chain issues and lower lumber and oriented strand board (OSB) prices have been a concern for this Zacks Rank #3 (Hold) company.
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Let us delve into the growth drivers.
Solid Export Market Demand: The company has been witnessing higher demand across export markets owing to a number of factors. Shipping and logistics challenges pushed the demand for North American logs in Japan. Notably, lumber imports from Europe into Japan continue to be restricted by ongoing global shipping challenges. Trade limitations have also impacted the import of Australian logs to China. Additionally, the Russia-Ukraine war has led to the ban of log exports from Russia. Hence, this tightening global wood market is expected to be conducive for Weyerhaeuser. Still-Positive Outlook for Residential Market: Although the residential construction activity has softened due to the rapid increase in mortgage rates, ongoing housing affordability concerns, high inflation and concerns over a possible recession, Weyerhaeuser still expects housing starts and demand for wood products to be above pre-pandemic levels in 2022. The company believes homebuilders have a solid backlog level to complete, which will support construction activity in the second half of 2022. Importantly, WY remains constructive on housing demand fundamentals given favorable demographic trends of significantly under-built housing stock and a healthy labor market. Meanwhile, the repair and remodel market continues to be supported by favorable demand from the professional segment. Although demand from the do-it-yourself (“DIY”) segment has slowed a bit as consumer sentiment turned cautious due to the recent macro uncertainties, the DIY activities are expected to improve as the housing market enters a period of relative softening, resulting in more people remaining in their existing homes. With an aging housing stock, WY continues to expect steady demand from the repair and remodel segment, with activity above pre-pandemic levels. Rising Capital Inflows for Carbon/ESG: More capital inflows for carbon/ESG-related projects are likely to prove beneficial for Weyerhaeuser. In March, WY announced an agreement with Oxy Low Carbon Ventures to pursue its first carbon capture and storage project. This partnership combines more than 30,000 acres of Weyerhaeuser's uniquely positioned subsurface ownership in Louisiana with Oxy's proven technical expertise in the management and sequestration of carbon dioxide. The project is expected to come online in 2025 or 2026. This project will mark an important milestone in its goal to grow the Natural Climate Solutions business. WY expects to announce additional carbon capture and storage agreements on portions of Southern U.S. acreage. Additionally, WY continues to progress on its forest carbon pilot project in Maine and has been working toward project approval by year-end. Stable Payout: Weyerhaeuser has a unique dividend structure. It pays a normal periodic dividend, a variable dividend and sometimes special dividends. In 2021, WY paid a quarterly dividend of 17 cents per share, a special dividend of 50 cents and a $1.45 variable dividend. WY also returned $134 million each during the first and second quarters of 2022. During the first quarter of 2022, WY increased the dividend by 5.9% to 18 cents per share. This aligns with its commitment to grow sustainable base dividends by 5% annually through 2025. The company is also committed to supplementing its base dividends each year with an additional return of cash to achieve the targeted annual payout of 75% to 80% of adjusted Funds Available for Distribution.
Lumber and OSB prices have been weakening as demand for homebuilding and repair and remodel activities have softened, and buyers remain cautious given uncertainty in the markets. Notably, Adjusted EBITDA for WY’s lumber business decreased by $289 million in the second quarter of 2022 compared to the first quarter. Moreover, adjusted EBITDA for OSB business decreased by $60 million sequentially during the period. The company also has been experiencing higher raw material costs, input costs for EWP, OSB web stock, resin and others. Overall, for the second quarter, the company’s adjusted earnings per share decreased 22.6% from the year ago adjusted figure. Net sales for the quarter also decreased 5.4% from the prior-year quarter.
Better-ranked stocks, which warrant a look in the Construction sector, include Arcosa ACA, United Rentals URI and Dycom Industries, Inc. DY. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here. Arcosa — sporting a Zacks Rank #1 — is a manufacturer of infrastructure-related products and services which serves construction, energy and transportation markets. ACA’s expected earnings growth rate for fiscal 2022 is 7.8%. The Zacks Consensus Estimate for current-year earnings has improved 13.7% over the past 30 days. United Rentals — currently flaunting a Zacks Rank #1 — is the largest equipment rental company in the world. URI’s expected earnings growth rate for 2022 is 43.8%. The Zacks Consensus Estimate for current-year earnings has improved 6.4% over the past 30 days. Dycom — a Zacks Rank #1 company — a specialty contracting firm operating in the telecom industry. It has been gaining from higher demand, extended geographic reach and proficient program management and network planning services. Dycom’s earnings for the current fiscal year are expected to grow by 134.2%.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Weyerhaeuser Company (WY) : Free Stock Analysis Report United Rentals, Inc. (URI) : Free Stock Analysis Report Dycom Industries, Inc. (DY) : Free Stock Analysis Report Arcosa, Inc. (ACA) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research
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