Weyerhaeuser's (NYSE: WY) stock price has been quite volatile this year. Shares cratered along with the stock market in March as COVID-19 fears nearly ground the global economy to a halt. That forced the timberland real estate investment trust (REIT) to suspend its dividend and production at some of its wood product mills.
However, lumber demand snapped back quickly, taking prices up with it, driving a big-time rebound in Weyerhaeuser's stock. While it still hasn't recouped all its losses, investors are likely wondering if they missed their chance to buy. Here's a look at the case for and against buying shares of the timber REIT right now.
The case for buying Weyerhaeuser
Shares of Weyerhaeuser soared during July, driven in part by its strong second-quarter earnings report. The timber REIT posted $0.11 per share of adjusted earnings, which was $0.10 per share ahead of analysts' expectations, even though it curtailed some of its wood products operations during the period because of COVID-19. The company more than offset that lost output via cost savings and surging lumber prices because of an uptick in repair and remodel activities.
Weyerhaeuser expects earnings from its wood products business to be significantly higher in the third quarter than what it reported during the second quarter due to strong lumber pricing and sales volumes. Lumber prices recently hit a record level due to surging demand from a boom in remodeling and homebuilding. That should enable the timber REIT to post even higher earnings that should offset the expected continued weakness in its timberlands business and a flattening of real estate, energy, and natural resources earnings. Those higher earnings could provide a further boost to the stock.
With lumber prices soaring, Weyerhaeuser could soon reinstate a dividend. On the one hand, it probably won't return the payout to its former peak since not all its businesses generate stable cash flows. However, the return of a dividend would make the stock more enticing to REIT investors, who typically desire an income stream.
The case against buying Weyerhaeuser
Weyerhaeuser suspended its dividend earlier this year to preserve cash so that its balance sheet didn't deteriorate. While the timber REIT does have an investment-grade credit rating, its leverage ratio has risen over the past several quarters. It ended the second quarter at 4.1 times debt-to-EBITDA, which is above its 3.5 times target. The company also has a sizable debt maturity coming up in 2023 that it would like to whittle down before it becomes problematic. These balance sheet concerns could weigh on the stock, especially if lumber prices were to take another tumble.
Another issue for REIT investors is that there's a lot more variability to Weyerhaeuser's earnings than typical of other real estate investment opportunities. Instead of benefitting from stable lease-secured cash flows, it has exposure to fluctuations in pricing and volumes in raw timber, wood products, real estate land sales, and its energy and natural resources segment. This volatility was evident last year as its adjusted EBITDA slumped from slightly more than $2 billion in 2018 to roughly $1.3 billion in 2019. While these fluctuations benefit it during good times (like right now for wood products), they can be a significant earnings headwind when market conditions soften, which was the case last year. This volatility has impacted Weyerhaeuser's ability to create value for investors over the years, causing it to significantly underperform the S&P 500.
Not all that attractive for REIT investors right now
On the one hand, there are some clear catalysts on the horizon at Weyerhaeuser. It should produce even better third-quarter results thanks to strong lumber pricing, which could enable it to reinstate a dividend. However, with shares already soaring off their bottom, the market has priced in much of this upside. Add that to the current lack of a dividend, its elevated leverage, and the overall volatility of its earnings profile, and this stock doesn't seem like an enticing buy for REIT investors right now.