Lower Harvest Costs And Occidental CCS Agreement Will Drive Outlook

Key Takeaways

• Transitioning to cost-effective harvest operations and rising export demand are expected to drive margin and revenue growth.
  
• Growth in Natural Climate Solutions and heightened EWP production will likely boost future earnings and improve production capabilities.
  
• Economic uncertainty, international trade challenges, and operational disruptions could negatively impact Weyerhaeuser's revenue and earnings across multiple segments.

Catalysts

Weyerhaeuser Company, one of the world's largest private owners of timberlands, began operations in 1900.

• Weyerhaeuser's transition to lower elevation and lower-cost harvest operations in the West is expected to decrease log and haul costs, improving net margins.
  
• Increasing demand for export logs in Japan due to decreased shipments of European lumber may enhance sales volumes and revenue.
  
• The carbon capture and sequestration (CCS) agreement with Occidental Petroleum represents a growth opportunity in Weyerhaeuser's Natural Climate Solutions business, likely boosting future earnings.
  
• Ongoing construction of the EWP facility in Arkansas and return to normal operations at the Montana facility will drive increased production, positively impacting revenue and net margins.
  
• Anticipated improvement in Southern Yellow Pine lumber prices and stable logs demand highlight potential for revenue growth and margin expansion.

Weyerhaeuser Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Weyerhaeuser's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 11.3% in 3 years time.
• Analysts expect earnings to reach $913.4 million (and earnings per share of $1.26) by about May 2028, up from $365.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $790.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.7x on those 2028 earnings, down from 50.7x today. This future PE is greater than the current PE for the US Specialized REITs industry at 29.5x.
• Analysts expect the number of shares outstanding to decline by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.85%, as per the Simply Wall St company report.

Weyerhaeuser Future Earnings Per Share Growth

Risks

• The recent ban on U.S. log imports by China and moderated demand could negatively impact sales volumes and average realizations, thereby affecting revenue from international markets.
  
• Elevated macroeconomic uncertainty and cautious buyer sentiment may lead to lower demand and pricing for lumber, which could impact both revenue and net margins in the Wood Products segment.
  
• The potential impact of tariffs on Canadian supply and anticipated Softwood Lumber duties could create cost pressures and market volatility, making it challenging to maintain stable revenues.
  
• Planned annual maintenance in the Oriented Strand Board (OSB) business and operational disruptions from unexpected events like the MDF facility fire could lead to increased costs and lower production, thus impacting earnings.
  
• The slower-than-expected start to the spring building season and cautious sentiment in the housing market can lead to decreased demand for Timberlands and Wood Products, which could negatively affect overall revenue and net earnings.

Valuation

• The analysts have a consensus price target of $34.25 for Weyerhaeuser based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $38.0, and the most bearish reporting a price target of just $30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.1 billion, earnings will come to $913.4 million, and it would be trading on a PE ratio of 32.7x, assuming you use a discount rate of 6.8%.
• Given the current share price of $25.54, the analyst price target of $34.25 is 25.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.