Forest Products Equities Gird for Richer Home Market Harvest

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Recently released government economic data further bolstered the wisdom of a stock portfolio with a position in forest products equities like Weyerhaeuser (NYSE: WY). This March, the U.S. Commerce Dept. announced that housing starts in February rose 0.8% to 917,000 units, while residential construction permits surged 4.6% to 946,000 units, setting the fastest pace for both benchmarks in nearly five years. These statistics indicate that the recovery of the U.S. home market is indeed gathering steam.

Other recent economic indicators suggest that there’s enough gas to fuel this resurgence. The U.S. Labor Dept. reported 236,000 new jobs were created this February, further trimming the country’s unemployment rate to 7.7% from 7.9% in January. Steady gains in job creation have helped boost housing demand and construction of new homes, which in itself contributes significantly to generating more employment opportunities.

A depleted home market inventory, estimated to be at its lowest since December 1999, is driving prices higher. All together these factors are expected to propel further gains in new home construction for the rest of this year.

Weyerhaeuser covers all bases

What makes Weyerhaeuser a strong stock portfolio candidate is that it stands to generate added revenue not just from its homebuilding wood products. Through its five subsidiaries operating in select major markets, the company counts among the top 20 U.S. homebuilders. Its real estate properties are located in the corporate home base Washington, and other metro areas of Arizona, California, Maryland, Nevada, Texas, and Virginia.

In 2012, Weyerhaeuser sold 2,314 homes, up from 1,912 in 2011. Its real estate operations generated $1.07 billion revenue last year, up from $838 million in 2011. Overall, Weyerhaeuser posted 2012 revenue of $7.06 billion, up from $6.22 billion the previous year. It netted $385 million, or $0.71 diluted EPS last year, up from $331 million or $0.61 diluted EPS in 2011.

Deltic tries a mimic

Deltic Timber (NYSE: DEL) is another forestry and wood products company poised to reap more benefits from a full-fledged U.S. home market recovery. Like Weyerhaeuser, it has a real estate component which is smaller in comparison, consisting of residential and commercial properties at Deltic’s home base in Arkansas. Besides real estate, timber sales and procurement, and lumber, this company’s products and services also include country club, timberland, and wildlife management, and hunting leases.

Deltic’s net sales in 2012 rose to $141 million from $121 million in 2011. Its net income increased to $9.2 million, or $0.73 a share, from $2.7 million, or $0.21 a share, in 2011. Providing a glimpse of the nascent housing recovery last year, the company’s real estate unit sold 50 residential lots in 2012, up from the 31 it sold in 2011.

Grand Rapids, Michigan-based, Universal Forest Products (NASDAQ: UFPI) too reaped some early rewards of the budding home market recovery in 2012 in terms of the higher lumber prices it sold at for the year. The company’s 2012 sales rose to $2.1 billion from $1.8 billion in 2011. Net income reached nearly $24 million for a $1.21 diluted EPS, up from the $4.5 million, or $0.23 diluted EPS, in 2011. A non-recurring net gain of about $8 million came from the sale of property, plant and equipment, the proceeds from which totaled $18.2 million.

More crops to reap for Weyerhaeuser

Laying the cards on the table, Weyerhaeuser could be the weightier choice among these forest products equities in terms of corporate profitability. The company’s return on average equity was estimated  at 13.64% as of end-December 2012. In comparison, Deltic Timber has 4.10% 2012 ROAE, while Universal Forest has 2.77%, using as basis its results as of end-September 2012.

Moreover, Weyerhaeuser has the distinct advantage of having more diversified revenue sources and significant international presence, which can serve as buffer to possible gyrations in the U.S. market. Last year, the company’s overseas sales amounted to $2.1 billion, representing 30% of its total revenues.

Arturo Cuevas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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