Why Is Weyerhaeuser (WY) Down 9.1% Since Last Earnings Report?

A month has gone by since the last earnings report for Weyerhaeuser (WY). Shares have lost about 9.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Weyerhaeuser due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Weyerhaeuser's Q3 Earnings & Sales Miss Expectations

Weyerhaeuser reported third-quarter 2018 results, wherein earnings and sales missed the Zacks Consensus Estimate by 28.2% and 2.6%, respectively, owing to significant headwinds from severe weather, trade policy and unusually volatile wood products markets.

Earnings from continuing operations before special items in the reported quarter were 28 cents per share, decreasing 17.6% from the year-ago figure of 34 cents.

In the quarter under review, Weyerhaeuser’s net sales were $1,910 million, up 2% year over year.

The company operates through three business segments, the results of which are given below:

Timberlands: The segment’s revenues in the third quarter were $653 million, down 2.1% year over year. It accounted for 34.2% of its net sales. Adjusted EBITDA came in at $206 million versus $220 million a year ago.

Real Estate, Energy and Natural Resources: The segment’s revenues, accounting for 5% of net sales, were $96 million. The figure increased from $82 million recorded in the year-ago period. Adjusted EBITDA grew to $86 million from $74 million a year ago.

Wood Products: The segment generated revenues of $1,346 million, accounting for 70.5% of net sales. The reported figure improved 3.6% on a year-over-year basis. Adjusted EBITDA came in at $250 million, down from $278 million a year ago.

Margin Profile Improves

In the reported quarter, Weyerhaeuser’s cost of sales grew 5.7% year over year to $1,452 million. It represented 76% of net sales versus 73.4% in the year-ago quarter. Gross margin contracted 260 basis points to 24%.

Selling expenses were down 9.1% year over year to $20 million, constituting 1% of net sales. General and administrative expenses, accounting for 4.1% of net sales, increased 4% year over year to $78 million. Research and development expenses were $2 million, which is half of the year-ago figure.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $505 million in the quarter, decreasing 11.2% year over year.

Balance Sheet & Cash Flow

Exiting the third quarter, Weyerhaeuser had cash and cash equivalents of $348 million, down from $824 million at the end of 2017. Long-term debt was $5,921 million versus $5,930 million at 2017-end.

In the reported quarter, the company generated net cash of $87 million from operating activities versus $323 million a year ago.

Outlook

For fourth-quarter 2018, Weyerhaeuser anticipates sequentially lower earnings and adjusted EBITDA at the Timberland segment. Results, however, will suffer from higher road and forestry costs, as well as a rise in fuel and unit-logging expenses. In the West, average sales realization is expected to be slightly lower sequentially. In the South, fee harvest volumes are expected to be higher and average log sales realizations are likely to be comparable.

For the Real Estate, Energy and Natural Resources segment, the company anticipates sequentially comparable earnings and adjusted EBITDA in the fourth quarter. For 2018, the segment’s adjusted EBITDA will be roughly $260 million.

It predicts sequentially lower earnings and adjusted EBITDA at the Wood Products segment. Average sales realizations for lumber and oriented strand board are expected to be considerably lower than the third quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -67.09% due to these changes.

VGM Scores

Currently, Weyerhaeuser has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Weyerhaeuser has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.