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080502 Deutsche Bank Report - WY's 1Q in 100 Words

Deutsche Bank - Equity Research

Weyerhaeuser {Ticker: WY, Closing Price: USD 63.68, Target Price: USD 95.00, Recommendation: Buy}.

* Weak Qtr, Interesting Signals.   Reported ($0.70), excluding charges & reserves, pointing to underlying ($0.24).  DB @ ($0.30),

FC @ ($0.17).   We think “true” underlying # is worse.  Considering $19MM jump in pension income. Balance of yr will be tough – probably worse than prior est's.

* Interesting commentary.   New CEO, Dan Fulton, insisted further changes wouldn't be “incremental.”  He suggested narrower set of criteria for retained manu'g businesses & hinted loudly about further overhead cuts.  Could they rethink Federal Way? 

* Segment results?

 * Timberland.   Disappointing.  EBIT = $116MM, Q4 = $133MM, 07Q1 = $175MM.  Lower log prices in West, fewer ”non-strategic” land sales.

* Wood Products.   Ouch!  EBIT = ($203MM), Q4 = ($210MM), 07Q1 = ($108MM).  Closed plants & throttled back on production.  OSB running @ 50%, lumber @ 70%.  Prices were very weak in Q1.

* Cellulose.   EBIT = $56MM, Q4 = $80MM, 07Q1 = $22MM.  Prices rose, but increased maintenance & higher inputs hurt. 

* Containerboard.    Performed well, considering slow qtr & internal turmoil.  EBIT  = $97MM,   Q4 = $103MM, 07Q1 = $69MM.

* Real Estate.    Not much good news.    EBIT = ($22MM), Q4 =  $143MM, 07Q1 = ($49MM).  No spring rally.  Sales & prices down.

* Looking ahead?  We expected only modest improvement in Q2.  H2 impact of pkg sale look modestly dilutive to EPS ($80-100MM in lost EBIT, $70MM drop in interest expense).  Wildcards?  Wood products volatility & lumpy land sales.

* Changes in view?   2008 looks even tougher than expected.  We hope Fulton "uses” crisis to move decisively.  We're trimming '08 from $0.50 to ($0.45), and '09 from $1.50 to $0.65.  We're maintaining Buy - - - our recommendation hangs on asset value and potential for going private/REIT conversion.