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Weyerhaeuser Surges on Sandy, but Wait for Lower Levels

Weyerhaeuser showed strong growth in wood products, the company's largest business, which posted a 54% year-over-year increase in revenue, rising 18% sequentially. On a sequential basis, timberland sales advanced only 7%. Sale of cellulose fibers were roughly flat year over year, but up only 2% sequentially.

Although Weyerhaeuser's real estate business was up 43% year over year, revenue plummeted by more than half (-51.8%) since the January quarter.

Weyerhaeuser's profitability, which tripled in the first quarter, more than made up for any near-term revenue concerns. Net income arrived at $144 million, or 26 cents per share, beating estimates of 23 cents. This was Weyerhaeuser's strongest profit showing in almost eight years, or three years before the housing crash.

Gross margin jumped 8 points to 21.4%, even as input costs rose 19%.

How much of Weyerhaeuser's second-quarter profits will be impacted if input costs continue to rise? That would have a negative impact on gross margins, especially because gross margin, which was up year over year, were flat from the fourth quarter.

Management doesn't expect margins to sway much in the second quarter, though, even as the company projects higher selling-related expenses due to the number of homes that the company anticipates will be closed. At the end of the first quarter, there was a backlog of more than 1,100 homes that were sold but not closed. Of these, management expects to close more than half, which would boost second-quarter revenue and profits.

Moving Forward

The report was good but far from spectacular. Given the high expectations presumed in the stock price, I expected a more bullish outlook from management. It seemed analysts at UBS concurred, because they issued a sell rating on the stock on April 29, while setting a price target on $24. UBS didn't have a favorable rating on the stock when it surged 23% from its November low, either.

Analysts at Raymond James and BMO Capital have upgraded the company to outperform and market perform, respectively. Argus has a buy rating on the stock with a $36 price target, a 20% premium from current levels. Outlook on the stock is mixed because there's a wide range of approaches to valuing companies in this sector.
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