Weyerhaeuser Company (WY), Rayonier Inc. (RYN): The Effects of an Improving Housing Market

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The housing market has been improving recently. The low interest rates set by the Fed to stimulate the economy and the declining unemployment rate have positively influenced the housing market. The demand for new homes is strong. According to several construction companies, there was a rise in new homes orders in the first quarter of 2013.

Houses in the United States are mainly built from wood. Further, S&P expects an increase in home starts of 35% in 2013. I believe that a strong demand for wood is imminent, and it will push commodity prices higher.

Weyerhaeuser Company

Therefore, I would like to look at some companies that might benefit from higher timber prices. Weyerhaeuser Company (NYSE:WY) and Rayonier (NYSE:RYN) each enjoyed an outstanding performance in the first quarter of 2013, but I believe the companies will continue to grow in the interim.

Rising timber prices should help these companies

Weyerhaeuser Company (NYSE:WY) is one of the leading U.S. forest-product companies with operations focused in Southern California, Nevada, Washington, Texas, Maryland and Virginia. The company reported increased net earnings totaling $144 million for the first quarter in 2013, compared to $41 million a year ago.

The company pays a 2.5% dividend, which corresponds to a payout ratio of 71%. Before recently, the last time the dividend was hiked was in August of 2012. However, on June 16, the company hiked its dividend again by 10% to $0.22 per share. The free cash outflow narrowed from $124 million to $109 million on a year-over-year basis. As the company continues to expand its free cash inflow, the dividend payment should not be in jeopardy.

In the near future, Weyerhaeuser expects higher sales volumes for all of its forest products. Also, for the second quarter, the company anticipates comparable earnings to the previous quarter.

Weyerhaeuser Company (NYSE:WY) has acquired 645,000 acres of high-value timberland in Washington and Oregon. This acquisition provides huge value for the company as the prices for lumber have declined by 20% year-to-date, and the company has paid a fraction of its price. As the housing market continues to improve, demand for lumber should gain strength, and prices for the commodity should rebound.

In addition, the company has properties in regions where the risks for forest fires are minimal. The prices of lumber should increase in the summer since it is expected to be hotter than usual, and forest fires could consume large amounts of timber. Weyerhaeuser Company (NYSE:WY) is expected to lose a minimal amount of lumber to fires, and it will be able to sell its products for a premium due to a dim supply of lumber.

Overall, the company should fare well in the interim, and a long position is highly recommended.

Rayonier Inc. (NYSE:RYN) is another major player in the timber business. Its major segment is  fiber production, which accounted for 70% of sales in 2012. The company manufactures high-value cellulose and absorbent-fluff pulp. The price for cellulose specialties is expected to increase 3% in 2013. For the first quarter, Rayonier reported a rise in revenue to $393 million, compared to $336 million last year. Its net income rose to $147 million, or $1.13 per share, from $53 million, or $0.42 per share.

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