Inflation resistant Weyerhaeuser Co might get cheaper

Weyerhaeuser Co (NYSE: WY) is an attractive play for the inflationary times for more reasons than one. Not only does this company pay nearly 2.0% in dividend yield, but its three-pronged focus on Timberlands, Real Estate, and Wood Products makes it a real asset with inflation-resistant qualities. While the price for timberland and wood products may fluctuate, their intrinsic value is tied to the dollar, which provides some protection from rising interest rates. 

Weyerhaeuser Co, a real asset for inflationary times 

In the long run, they’re not making any more land, and trees take a long time to grow so Weyerhaeuser Co’s cash flow is all but assured, which is excellent news for income investors. Weyerhaeuser Co can also provide diversification away from risker investments in green energy while still providing solid returns for investors. 

"Year to date, we have generated $2.7 billion of Adjusted EBITDA and $1.9 billion of Adjusted Funds Available for Distribution. Looking forward, we remain constructive on long-term demand fundamentals that support our businesses, notwithstanding the recent macroeconomic headwinds. Our financial position is exceptionally strong, and we remain committed to delivering operational excellence across our unmatched portfolio of assets and enhancing shareholder value through disciplined capital allocation,” said Devin W. Stockfish, president and chief executive officer.

Weyerhaeuser outperforms despite softening margin 

Weyerhaeuser had a tough quarter but outperformed the consensus estimates despite softening margins. The company says lower price realizations and higher costs impacted all segments, but there are two takeaways. The first is that top and bottom line results beat the consensus estimates, and the second is that adjusted cash flow margins improved sequentially. The $3.00 billion in net revenue fell -3.2% versus last year but beat by 490 basis points, while on the bottom line, the adjusted $1.06 beat by $0.08. The adjusted EPS is down on a sequential basis but offset by a net increase in cash from ops and adjusted Funds Available for Distribution. 

The guidance is a little soft as well but ultimately positive for the dividend and the dividend growth outlook. The company says EPS will be flattish in Q3 versus last due to mixed results within the business. The Timberlands segment is expected to see earnings fall sequentially but rise versus last year, while the Real Estate & Natural Resources segment will contract due to lower expected sales volume, and Wood Products will be flat. The takeaway is that cash flow will remain strong enough to fuel the dividend and share repurchases. The company bought back 0.4% of its shares during the quarter and 0.8% since last year. 

The sell-side is invested in Weyerhaeuser Co

The sell-side activity in Weyerhaeuser Co hasn’t been robust over the last year but there is at least one takeaway to be had: the sell-side is heavily invested in Weyerhaeuser Co, and they see the potential for at least a low double-digit upside. On the institutional end, the institutions have been net buyers for at least the last year and have increased their holdings to over 82%. On the analyst's side, there are 5 analysts with coverage out this year, and they rate the stock a Moderate Buy with a price target 17% above the current price action. 

The technical outlook: Range-bound Weyerhaeuser capped at midpoint 

The price action in Weyerhaeuser Co popped in the wake of the earnings report, but the gains were capped by resistance. Resistance is at the midpoint of a trading range that has dominated prices for the last 15 months, so it may be strong enough to drive prices lower. If the price action does move lower, support is likely at the bottom of the range near $33. If, however, the market is able to push price action higher, the midpoint of the range is still a likely target for resistance. If that is broken, a move up to the top of the range will become the likely scenario.