A Company for the Housing Recovery
Stephen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The housing market is showing signs of recovery. Before talking about the positives, I think it’s best to really show the severity of the situation. This chart shows Single-Family housing starts for each year starting in 1990.
Source: Joint Center for Housing Studies
While it’s unlikely there will be a return to the boom of the early 2000’s, it’s clear there is still a lot of room to grow to reach normal levels. Recent data indicates the housing market is slowly on its way back. The latest joint release from the U.S. Census Bureau and U.S. Department of Housing and Urban Development showed a 6.8% increase in new building permits and while home starts fell 1.1% the overall trend this year is still very positive. I’m looking for companies that stand to benefit from the improvement of the housing market; I narrowed my search to raw material providers, specifically lumber. Weyerhaeuser Inc (NYSE: WY) is such a company that also has a home building segment: sporting the best of both worlds for investing in housing.
Weyerhaeuser has a complete “soup to nuts” operation; from developing land, to growing the trees and selling either the logs of finished wood products to their customers. The company owns or leases 6 million acres of land in the United States and has long-term licenses on another 14 million acres in Canada. All business segments suffered from the recession, some more than others:
It’s unlikely the housing market will see the construction boom of the early 2000’s anytime soon, but any improvement will be good news for Weyerhaeuser. The same can be said for two comparable companies, Potlatch Corporation (NASDAQ: PCH) and Plum Creek Timber Co. (NYSE: PCL).
A concern I have for Weyerhaeuser is the debt situation. I will give the company credit for reducing its long-term debt by 15% since the beginning of 2011, but for the first two quarters of 2012 the interest expense ($173 million) has exceeded earnings before income tax ($127). The company has roughly $850 million in cash and $570 million in debt due over the next 5 years. Last year it generated about $70 million in free cash flow and has so far generated $80 million this year. So things are far from unsustainable, but it’s certainly something worth keeping an eye on.
Conditions are primed for a strong housing recovery. The poor economy and slow recovery are holding a significant number of potential homeowners at bay. The demand for rentals has surged, although a 2011 survey by Fannie Mae found that 80% of renters between age 18 and 34 believed they would one day be homeowners. The combination of higher demand for rentals and lower interest rates on home loans has created a unique scenario where the mortgage payments are cheaper relative to rents!
The incentives are stacked heavily in favor of home ownership; we just need the recovery to happen. I believe it’s inevitable, although slow moving, and thus believe housing starts will rebound to pre-2000 levels within a reasonable time horizon. More starts equals more business for Weyerhaeuser’s real estate segment and more lumber sales to other home builders. For these reasons I am bullish on Weyerhaeuser and will make an Outperform CAPS call along with adding the stock to my Watch list.
drfrank1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Weyerhaeuser Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.