Weyerhaeuser Earnings: Lumber Prices Weigh on Results Despite Uptick in Demand

No-moat-rated Weyerhaeuser WY reported solid second-quarter results given the current lumber market. Revenue fell almost 33% year over year as its wood products and timberland businesses both experienced double-digit declines. Weyerhaeuser’s consolidated operating margins decreased roughly 400 basis points from a year ago to 16% but improved sequentially due to a strong demand for engineered wood products. Weyerhaeuser now faces a challenging second half of the year as rising interest rates continue to pressure housing markets and lumber demand. Nevertheless, we maintain our $35 fair value estimate.

Weyerhaeuser’s wood products segment reported somewhat surprising results given current market conditions as revenue declined roughly 36%, but the segment reported a 14.5% operating margin. While this seems relatively low, and it is when compared with the last few years, it’s a roughly 700-basis-point increase sequentially. This was largely due to a strong performance in engineered wood products, driven by new home construction in the U.S. Additionally, lower raw material costs provided room for margin expansion despite slightly higher unit manufacturing costs for lumber and OSB. Weyerhaeuser’s timberland segment performed relatively well in the quarter as strong domestic sales volumes offset weaker exports during the quarter. Additionally, segment operating margins held up well amid stable fee harvest volumes and log prices.

Current macroeconomic conditions continue to weigh on Weyerhaeuser’s financial performance, as higher interest rates have suppressed lumber demand and ample supply has pressured prices. Lumber prices haven’t seen much improvement through the first half of the year as rising interest rates continue to weigh on the housing market. While some conditions have improved, including a slowdown in European lumber imports, we expect ample domestic production will limit lumber price growth for the remainder of the year.