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

The dividend safety seems stable in the future. The company finished the quarter with net cash and cash equivalents totaling $266 million compared to $236 million a year ago. The company was able to generate $57 million in free cash flow. Dividend hikes may be expected with such a strong balance sheet.

The company has a strong presence in the Atlantic and the Gulf of Mexico. Home prices are expected to rise in that region for the rest of 2013, and Rayonier’s revenue should be higher. Rayonier Inc. (NYSE:RYN) also exports forest products to China, and the demand should increase for the rest of 2013.

Some companies might not be as profitable

Resolute Forest Products Inc (NYSE:RFPfabricates a variety of papers, including newsprint, coated and specialty papers. The company did not fare well in the first quarter of 2013. Although its sales rose by $20 million to $1.1 billion year-over-year, an increase in its costs of operation resulted in negative net income. The company’s net income resulted in a loss of $50 million, or -$0.05 per share.

What worries me is the negative free cash flow generated from the company. The cash flow from operating activity swung to a loss of $20 million from a gain of $57 million last year. After capital expenditures, its free cash flow flipped to a loss of $60 million. The company does not look healthy in financial terms.

To repay its debt, the company issued $600 million in senior notes due 2023 at 5.8%. The company plans to use the capital to repay $501 million outstanding 10% senior secured notes due by 2018. It sounds like using a credit card to pay another credit card. At some point in the future, the strategy may not work.

Apart from the imminent struggle that the company will have to repay its debt, the future of its paper business does not seem promising. Other companies such as Weyerhaeuser have decommissioned their paper production divisions because they are becoming unprofitable. Technology has pushed consumers to the digital era, and the demand for paper is declining. Also, as the housing market continues to recover, a strong demand for lumber products will increase the costs of operation for Resolute since wood is the raw material to fabricate paper products.

I believe Resolute Forest Products will have financial issues in the near future, and I do not recommend having a long position in this company.

Let’s wrap it up

The housing market is improving. Housing prices and new-home orders are jumping. Therefore, the demand for lumber should increase. Weyerhaeuser and Rayonier Inc. (NYSE:RYNare positioned to bring further growth and capital appreciation to their stockholders. Resolute Forest Products is in imminent danger since the company had a negative free cash flow. The demand for its paper products should weaken while its costs of operation will increase.

Weyerhaeuser Company (NYSE:WY) was clever enough to shut down its paper production facilities. Rayonier will see increasing revenue as the demand for its specialized fabrics grows stronger. For these reasons, having a long position in Weyerhaeuser and Rayonier Inc. (NYSE:RYN) may not be a bad idea.

Robinson Roacho has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article The Effects of an Improving Housing Market originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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