Weyerhaeuser: Weeding the Forest

The world's biggest lumber company, Weyerhaeuser, is slimming down and spiffing up its operations. The Federal Way, Wash., timber producer has been shuttering and selling lagging mills and is looking to unload its under performing fine-paper unit. Weyerhaeuser (symbol WY) is also changing the way it does business. The company is trying to better manage inventories by stocking lumber based on forecasts from customers, not on Weyerhaeuser's own estimates.

These restructuring efforts are behind an upgrade of Weyerhaeuser's shares from neutral to buy on Tuesday by UBS Investment Research analyst Richard Schneider. The stock is down 21% from its 52-week high of $76 in April, primarily because of the overall market's decline and growing concern that cooling housing starts will mean less demand for lumber. Schneider says the lower price means "increased potential upside" for the stock, which closed at $60 on Tuesday. He gave it a 12-month price target of $73. The stock trades at 16 times the $3.76 per share that analysts expect the company to earn in 2006, according to Thomson First Call.

Schneider cited several catalysts that could benefit Weyerhaeuser, including the pending decision to sell the lagging fine-paper unit, which he estimates could net $2.5 billion. Schneider also said a potential cut in the tax rate on timber sales could save the company $200 million annually. A bill to reduce that rate from 35% to 14% passed the House of Representatives last week and is being heard in the Senate this week.

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What's more, Weyerhaeuser's balance sheet is reasonably strong, Schneider said. The company is focusing on returning cash to shareholders and in mid June raised its dividend 20%, to $2.40 per share.

In April, Weyerhaeuser reported first-quarter income of $166 million, down from $239 million during the same period a year ago because of a charge related to its fine-paper business. Sales were flat compared with the first quarter of 2005. After the earnings release, the company announced that it was considering selling all or part of the fine-paper unit. Officials wouldn't divulge specifics but said the company was in active discussions about the sale.