Weyerhaeuser and competitors Plum Creek Timber Co. Inc. (NYSE: PCL) and Rayonier Inc. (NYSE: RYN) are REITs, while smaller competitor Pope Resources LP (NASDAQ: POPE) is a limited partnership. Over the past 12 months, only Rayonier has significantly boosted its share price. Rayonier’s jump was almost entirely due to a 1-for-1.5 stock split in late July.

Wood products companies such as Louisiana-Pacific Corp. (NYSE: LPX), Universal Forest Products Inc. (NASDAQ: UFPI), BlueLinx Holdings Inc. (NYSE: BXC), Builders FirstSource Inc. (NASDAQ: BLDR), and Deltic Timber Corp. (NYSE: DEL) have performed better. These companies are more closely tied to the US homebuilding and remodeling market, which has been improving in the first quarter of this year.

But will that continue? The bigger companies like Weyerhaeuser, Plum Creek, and Rayonier depend on exports to China to keep revenues and profits up. Chinese log imports totaled $8 billion last year, and North American logs contributed 22% of China’s total imports in 2011.
The bad news is that Chinese imports fell -11% in the first three months of this year, but the losses hit New Zealand and Russia hardest. Canadian log exports to China rose 23% in the first quarter and US exports rose 2%. And those gains were due, at least in part, to lower prices for North American logs.

New home construction in the US will drive log and lumber prices. If more homes are built, US demand will rise and so will prices. The various indicators for increased homebuilding in the US are mixed, but the optimistic view that construction will increase is certainly problematic. A warm winter could have pulled some construction starts ahead into the first quarter. The same is true of remodeling projects that would have improved the first quarter performance of the wood products companies.

Weyerhaeuser, which also builds and sells houses, “anticipates a small loss from single family homebuilding operations” in the second quarter. The company’s first quarter revenue from home sales fell by about -50% sequentially. While that’s not a leading indicator for the rest of the country’s homebuilders, it could be the canary in the coal mine.

Weyerhaeuser’s shares are up 0.9% in pre-market trading this morning, at $21.06, in a 52-wekik range of $14.82-$23.91.

Paul Ausick

But, news out of places like Nortel (NT), Whirlpool (WHR), and Hewlett-Packard (HPQ) indicate the prophylactic job cuts are being made in almost every industry.

Even Dell (DELL), which made over $700 million last quarter and has $8 million of cash on hand is talking about sharply lowering expenses.

According to Reuters, "Planned layoffs at U.S. firms surged to their highest in nearly five years during October, with cuts in the financial and auto sectors leading the charge as the economic outlook worsened, a report by outplacement firm Challenger, Gray & Christmas said."

That means that the pace of job cuts could be rising at a rate faster than the 200,000 or so people who were put out of work last month. Instead of moving to 6.6% or 6.7% by year-end, unemployment could move higher that 7%.

The news also means that the vicious cycle of layoffs leading to more layoffs is accelerating. As those who are unemployed move out of the pool of consumers, GDP is undercut and companies have to chop costs further to stay ahead of falling sales.

Douglas A. McIntyre

Jon C. Ogg
August 20, 2007