Weyerhaeuser analysis
WEYERHAEUSER COMPANY ANALYSIS
JOHN JONES
Investments – MBAE 6413
Professor Castro
August 29, 2002
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Weyerhaeuser analysis
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Abstract
Weyerhaeuser Company is principally engaged in the growing and harvesting
of timber and the manufacture, distribution and sale of forest products, real
estate development and construction. Weyerhaeuser Company is a large-cap
value company in the basic industries sector and has an index membership in
the Standard & Poor’s 500. For the 26 weeks ended 6/30/02, revenues rose
21% to $8.6 billion. Net income before extraordinary item fell 55% to $125
million. Weyerhaeuser increased its interest-bearing debt by $8.2 billion,
primarily due to funding the acquisition of Willamette Industries for $6.1 billion.
Weyerhaeuser’s debt to capital ratio was 56 percent at the end of the 2002second quarter, up from 38 percent at the end of 2001. The purpose of this
analysis was to determine the financial strength of Weyerhaeuser Company.
The company is a moderate buy for investors. Weyerhaeuser’s goal should be to
pay down the additional debt using cash flow from operations and to return to
historic debt ratios within three to five years.
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Introduction
The objective of the Weyerhaeuser Company investigation is to provide senior
management with an analysis of the company’s financial condition. This analysis
depicts relevant information, which includes stock prices, debt, cash flows,
earnings estimates, etc. Ratios are utilized and forecasts are made which I
believe will highlight the strengths and weaknesses of the company. This
information, if utilized correctly will strengthen Weyerhaeuser’s position within the
forest products industry and the overall market in general.
Literature Review
One literature review was utilized as a comparison for the analysis of
Weyerhaeuser Company. Harry Domash conducted the review. The
methodologies and ratios utilized within his report were:

Price/Sales ratio

Price to earnings multiple

Cash flow per share

Average daily volumes

Financial health grades

Growth grade

Institutional ownership

Number of analysts making recommendations

Gross margin trend
Harry Domash’s findings reflected many of the analyses and conclusions
conducted within this text. Many of the same resources were utilized for
Weyerhaeuser analysis
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information gathering purposes. His positive conclusions were that
Weyerhaeuser’s most recent quarterly earnings report was significantly higher
than analysts’ consensus forecast and the price to sales multiple is slightly lower
than the average for all stocks. The negatives were the price to earnings multiple
is higher than the average for all stocks and the measure of relative price change
and consistency is very low. Harry Domash recommended Weyerhaeuser
Company as a moderate buy.
Description of the Company
When a tree falls in one of Weyerhaeuser’s forest, you can bet someone’s
there to hear it, and he’s probably holding a chainsaw. One of the largest US
forest products companies (employees 44,800) and North America’s largest
producer of softwood lumber, Weyerhaeuser Company is principally engaged in
the growing and harvesting of timber and the manufacture, distribution and sale
of forest products, real estate development and construction, and other real
estate-related activities. Weyerhaeuser’s business segments are timberlands,
wood products, pulp, paper and packaging, and real estate. Weyerhaeuser is
engaged in the management of 5.9 million acres of company-owned land, .5
million acres of leased commercial forestland in North America, and holds the
cutting rights to more than 32 million acres in Canada. Their wood products
businesses produce and sell softwood lumber, plywood and veneer; oriented
strand board, composite and other panels; engineered lumber, hardwood lumber
and treated products. The Company’s pulp, paper and packaging business
includes pulp, paper, containerboard, paperboard and recycling.
Weyerhaeuser analysis
Data Collection and Analysis
The data for this paper was collected from Weyerhaeuser’s annual report and
numerous Internet resources. The data includes financial statements (balance
sheet, income statement, and cash flows), historical stock prices, debt, liquidity,
and any other relevant information. The information is used to create ratios,
estimation, and predictions. The purpose of the analysis is to determine the
financial condition of Weyerhaeuser Company. The statistics at a glance for
Weyerhaeuser Company are as follows:
Financials
Sales
Income
Earning/Share
Dividend Rate
Dividend Yield
Total Cash
Last 12 Months
16.1 Bil
201.0 Mil
.80
1.60
2.90%
141.0 Mil
Stock Activity
Last Price
52 Week High
Volume
Average Daily Volume
Volatility (beta)
54.30
68.09
1.14 Mil
1.13 Mil
1.0
Fundamental Data
Debt/Equity Ratio
Return on Equity
Net Profit Margin
Shares Outstanding
Market Capitalization
1.97
3.00%
1.20%
218.9 Mil
11.89 Bil
Earnings Estimates
Qtr (9/02) EPS Estimate
FY (12/02) EPS Estimate
Current P/E
FY (12/03) EPS Estimate
.36
1.42
67.90
3.91
Institutional Statistics
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Weyerhaeuser analysis
Analyst Consensus
Institutional Ownership
Moderate Buy
72.10%
Management Effectiveness
Return on Assets (ttm)
Return on Equity (ttm)
.89%
2.96%
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Methodology and Ratios Used
The following is a checklist of important points and ratios that were utilized for
evaluating Weyerhaeuser Company:

Beta – An important measure of a stock’s volatility in relation to the
Standard & Poor’s 500, which has a beta of 1.0. A beta higher than
this implies greater volatility than the overall market.

P/E ratio – The latest closing price divided by the latest 12-month’s
earnings per share. P/E is perhaps the single most widely used factor
in assessing whether a stock is pricey or cheap. A company’s P/E
should be looked at against those of similar companies, and against
the stock market as whole, since different industries and even different
companies are characterized by markedly different P/Es.

Earnings per share estimate – The average estimate for the quarter or
year by analysts covering a given company.

Institutional ownership – Percent of a company’s shares owned by
banks, mutual funds, pension funds, insurance companies and other
institutions, all of them characterized by prosperity to buy and sell in
bulk. Institutional ownership is a sign of legitimacy for a public
company, and liquidity for its shares.

Daily volume (13 week average) – The average number of shares of a
company’s stock traded daily over the previous 13-week period. Daily
volume is one indicator of how liquid a security is. A low daily volume
could imply low interest in a stock, a limited float (number of
outstanding shares) and/or a highly volatile share price.

Analysts’ ratings – Number of analysts making buy/hold/sell
recommendations. Sufficient analysts coverage is necessary to
create investor interest, especially from institutions.
Results and Conclusions
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The beta analysis for Weyerhaeuser Company as compared to the Standard
& Poor’s 500 is illustrated in the graph below. The chart, which represents a
period of two years, was obtained from the website
http://stockcharts.com/webcgi/perf.html. The blue line represents
Weyerhaeuser’s stock; the red line represents the S&P 500. By definition, the
S&P 500 has a beta of 1.0. According to various analysis’s, Weyerhaeuser’s
beta is also 1.0. Therefore, Weyerhaeuser Company is not considered volatile as
compared to the overall market.
The Price/Earnings ratio is perhaps the single most widely used factor in
assessing whether a stock is pricey or cheap. The P/E ratio is the latest closing
price divided by the latest 12-month’s earnings per share. A high P/E is often a
reflection of lofty expectations for a stock, since no one would invest knowing it
would take 40 years just to make one’s money back. The idea is that earnings
will grow. A high P/E can also reflect poor recent earnings. A low P/E can imply
low investor expectations, an undervalued stock, or both. Weyerhaeuser’s P/E
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ratio was taken from the website www.yahoofinance.com. The information below
notes a comparison between Weyerhaeuser, the industry, and its business
sector.
Description
P/E
Weyerhaeuser Company
Industry: Forest & Wood Products
Sector: Basic Materials
59.74
55.89
33.16
As noted from the ratios, Weyerhaeuser is outperforming the industry and the
sector.
The earnings per share (EPS) is another important point to check when
evaluating a stock. The data below was taken from the website
http://moneycental.msn.com/investor and reflects Weyerhaeuser’s EPS and
earnings growth.
Earnings Per Share – Quarterly Results
1st
Qtr
2nd Qtr
3rd Qtr
4th Qtr
Total
FY (12/02)
.14
.36
NA
NA
.46
FY (12/01)
.49
.78
.41
-.07
1.61
FY (12/00)
1.04
.89
.90
.88
3.71
Earnings Growth
This Quarter Est.
Next Quarter Est.
This Year Est.
Next Year Est.
Past 5 Years
Next 5 Years Est.
Weyerhaeuser Co.
N/A
N/A
N/A
163.8%
8%
7%
Industry
52.6%
450%
140.1%
192.0%
N/A
7.32%
Sector
48.6%
290.9%
44.2%
69.8%
N/A
9.76%
S&P 500
17.8%
31.2%
10.2%
18.5%
N/A
12.18%
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Noting the earnings growth potential for Weyerhaeuser Company, the next
two-years should be very exciting times for investors and the forest and wood
products industry in general.
Institutional ownership is the company’s shares owned by banks, mutual
funds, pension funds, insurance companies, and other institutions. Institutional
ownership is a sign of legitimacy for a public company, and liquidity for its shares.
It implies that a firm has gained access to vast pools of capital controlled by
institutional investors – capital that might not other wise be available. The
information of ownership for Weyerhaeuser Company was obtained from the
website http://biz.yahoo.com/hd/w/wy.html.
Top Institutional Holders
Shares %Out*
Value** Reported
Wellington Management Company
8,362,800
3.83
$454,100,040 31-Mar-02
Barclays Bank Plc
7,883,083
3.61
$428,051,406 31-Mar-02
Putnam Investment Management, Inc.
7,398,175
3.39
$401,720,902 31-Mar-02
Citigroup Inc.
6,318,261
2.89
$343,081,572 31-Mar-02
Morgan Stanley
5,698,965
2.61
$309,453,799 31-Mar-02
Institutional Capital Corporation
4,862,380
2.23
$264,027,234 31-Mar-02
State Street Corporation
4,816,092
2.2
$261,513,795 31-Mar-02
Capital Research and Management
Company
26,617,700
12.18 $1,445,341,110 31-Mar-02
FMR Corporation (Fidelity
Management & Research Corp)
3,729,734
1.71
$202,524,556 31-Mar-02
Vanguard Group, Inc. (The)
3,684,275
1.69
$200,056,132 30-Jun-02
Shares %Out*
Value** Reported
Top Mutual Fund Holders
Washington Mutual Investors Fund
10,000,000
4.58
$543,000,000 30-Jun-02
Investment Company of America
5,375,000
2.46
$291,862,500 30-Jun-02
Income Fund of America Inc
4,852,900
2.22
$263,512,470 30-Jun-02
Vanguard/Wellington Fund Inc.
4,725,200
2.16
$256,578,360 30-Nov-01
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College Retirement Equities FundStock Account
3,100,470
1.42
$168,355,521 31-Dec-01
Putnam Fund For Growth and Income
3,021,517
1.38
$164,068,373 31-Oct-01
Putnam Voyager Fund
2,768,200
1.27
$150,313,260 31-Jan-02
Morgan Stanley Dividend Growth
Securities
2,600,000
1.19
$141,180,000 28-Feb-02
Fundamental Investors Inc
2,025,000
0.93
$109,957,500 30-Jun-02
Vanguard/Wellesley Income Fund
1,797,000
0.82
$97,577,100 31-Mar-02
*Institutional holdings as a percentage of the current shares outstanding.
Institutional holdings account for 72% of Weyerhaeuser Company shares.
The lack of institutional ownership means mutual funds, pension plans and other
institutional buyers do not think they will make money owning the stock.
Institutional buying is an important catalyst for stock price growth. Institutions
buy hundreds of thousands of shares and prefer stocks with large daily trading
volumes so they can easily move in and out of positions. The graphs below
depict the daily volume trading per day for Weyerhaeuser Company and its stock
price chart for the 50-day moving average and the 200-day moving average. The
information below was obtained from the website
http://biz.yahoo.com/hd/w/wy.html. The volumes traded per day and the moving
averages were based upon a two-year period. The red line represents the
moving average stock price for the 50-day period; the green line depicts the 200day moving average stock price, and the blue line represents the actual stock
price per day for Weyerhaeuser Company.
According to one analysts, it is O.K.
to buy if average daily volume is 100,000 shares or higher and above one million
is best. Weyerhaeuser’s average daily trading volume for the last thirteen-week
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period was 1.13 million shares per day. The 50-day moving average stock price
was $58.57/share and the 200-day moving average stock price was
$58.96/share.
A company’s performance can go unrewarded if nobody knows about it.
Sufficient analyst coverage is necessary to create investor interest, especially
from institutions. The rule of thumb is to have at least four analysts as currently
making strong buy, buy, hold, under perform, or sell recommendations. Look
only at the total number of analysts making recommendations, not whether there
are more buys than holds. The analyst ratings for Weyerhaeuser Company
shown below were taken from Zacks Investment Research located at
http://moneycental.msn.com/investor.
Weyerhaeuser Company: Analyst Ratings
Zacks average brokerage
recommendation
is Moderate Buy.
Recommendations
Current
1 Month Ago
2 Months Ago
3 Months Ago
Strong Buy
6
7
5
5
Moderate Buy
4
3
3
3
Hold
2
2
3
3
Moderate Sell
0
0
0
0
Strong Sell
0
0
0
0
Mean Rec.
1.67
1.58
1.82
1.82
Mean Recommendation Conversion Table
1.0 = Strong Buy
1.1 thru 2.0 = Moderate Buy
2.1 thru 3.0 = Hold
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3.1 thru 4.0 = Moderate Sell
4.1 thru 5.0 = Strong Sell
According to the analysts, Weyerhaeuser Company is a moderate to strong
buy for investors. This data along with the other key points utilized in this
analysis depicts that Weyerhaeuser Company is a good, sound investment.
Weyerhaeuser Company is one of the better performing forest products industry
companies. Its management team has made good sound decisions and is
positioning Weyerhaeuser Company to perform well in the future.
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