As an investor, if there is ever a time for engaging in even more diligent “due diligence,” that time is now. There’s a lot of hot air blowing around, and it isn’t just because summer’s arrived. The current investment climate is rife with hype, bold (and maybe even some unfounded prognostications), and contradictory views that can confuse investors.
I’m looking at the lumber, forest products, and paper & paper products industries and considering whether all the giddiness lately means they’re worth investing in.
Weyerhaeuser Company (NYSE:WY) is one of the world’s largest private owners of timberlands. The company recently acquired Longview Timber in a $2.65 billion deal. Weyerhaeuser Company (NYSE:WY) will receive approximately 645,000 acres of U.S. Pacific Northwest timberland with this acquisition.
Additionally, the company also reported recently that it will invest CAD$23 million in their its mill in Drayton Valley, Alberta. This sawmill produces a variety of spruce-pine-fir lumber products for North America and Asian customers. Spruce-pine-fir lumber is a suitable choice for house construction and home projects.
Therefore, Weyerhaeuser Company (NYSE:WY) is positioning itself even more to capitalize on some new strength in the American housing market. The company’s CEO, Mr. Dan Fulton, stated, ” We believe our company is uniquely positioned to maximize the value of these timberlands.”
Weyerhaeuser Company (NYSE:WY) owns or controls, mainly in the U.S., more than 6 million acres of timberlands. Furthermore, the company manages an additional 14 million acres under long-term licenses in Canada. Of note to investors is that it is continuing to build that abundance of resources necessary to fulfill any sustained demand that may come from the U.S. and China.
A paper and paper products company, Resolute Forest Products Inc (NYSE:RFP) has 22 pulp and paper mills and 20 wood products facilities. The company had sales of $4.5 billion last year. As of April 1, 2013, it managed approximately 11.5 million acres of North American forestland.
In November 2012, it announced major investments in two of its sawmills. totaling C$11 million. This involves its Comtois sawmill ($9 million) in Lebel-sur-Quévillon, Quebec, and its sawmill in Senneterre, Quebec ($2 million). The company indicates that it will concentrate on wood products because of the positive outlook for lumber.
Potlatch Corporation (NASDAQ:PCH) owns approximately 1.42 million acres of forestland in Arkansas, Idaho, and Minnesota. Through a subsidiary, it also operates several manufacturing facilities which manufacture lumber and panel products. The company produces approximately 650 million board feet of lumber and 160 million square feet of plywood at its facilities.
The company believes that as the housing market recovers, harvest volume and prices should increase in tandem over the next few years. Potlatch Corporation (NASDAQ:PCH) indicates that it has the flexibility to monetize sawlog or pulpwood harvests. It further indicates that it will aggressively pursue sawlog harvesting upon the recovery of sawlog pricing. Better sawlog pricing is dependent on the U.S. housing market.
The general view is that the U.S housing market is more robust and that everyone can still count on China for sales. However, there are some chinks in the timber logs.
Resolute Forest Products Inc (NYSE:RFP) has its Fort Frances, Ontario (pulp and paper operation) kraft mill and paper machine number 5 indefinitely idled. CEO, Mr.Richard Garneau, said in November 2012, “The markets for these products are challenging and are expected to remain so. The kraft mill situation is particularly difficult given Fort Frances’ operating configuration and the recent decision by a key customer to stop consuming the pulp supplied by Resolute Forest Products Inc (NYSE:RFP) to its mill.” The company subsequently announced (March 2013) the idling of a newsprint machine at its Tennessee operations.
U.S recovery?
Kevin Carmichael of the Globe and Mail newspaper in Canada stated in a recent June article, “The debate over when the Federal Reserve will begin to reduce its hefty stimulus is suddenly murkier after a report showing the U.S. economy emerged from the first quarter much weaker than previously believed.” (emphasis mine)
His article further stated that, “Including the final three months of 2012, when GDP barely grew, the U.S. economy now is facing three consecutive quarters of growth at an annual rate slower than 2 per cent.”
Then you have the massive U.S. national debt as well as household debt. You have a lumber, forest products, paper and paper products industry dependent on a U.S. populace that’s financially stable, with employment on a strong, sustained upward trajectory. There are indications of some headway in housing and employment, but this all could crash and burn like dried tinder very fast.
As a March 21, 2013, NPR article indicated, pessimists note that, “Loans may be cheap, but only for people with sterling credit scores. With unemployment still so high at 7.7 percent and wages scarcely growing, millions of Americans can’t qualify for home loans.” (www.npr.org, You Be The Judge: Is The Housing Market Really Improving?, Marilyn Geewax)
Am I convinced?
So, should I invest in any of the above companies? I’m not so sure. I don’t think sustained growth is a guarantee. You have those touting the new found health of the U.S. economy; you have the contrarians naysaying those outlooks. News reports abound that everything’s coming up roses this past spring and now summer, while others are pointing at the dried-out roots of a still very unhealthy economy.
Let’s face reality and realize that the U.S. economy is a fragile house of cards, and is not conducive to long-term sustained growth for the lumber, or any similar industry dependent on home sales. However, don’t believe me, or anyone else. Do your due diligence — and make the decision that’s right for you.
Investors, stop and think…who do you believe?
The article Investors: Who Do You Believe? originally appeared on Fool.com and is written by Michael Ugulini.
Michael Ugulini has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Michael is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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