Weyerhaeuser Goes 3-D With Its Efficient Land Usage (NYSE:WY)

Layers of ground

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Weyerhaeuser (NYSE:WY) has enjoyed a couple of quarters of insanely high lumber prices which have fueled record profitability, but this has little to do with what makes it a strong long term investment.

Lumber prices will fluctuate but WY’s operational efficiency will consistently set it ahead of the pack. Even amidst the commodity price frenzy WY continues to demonstrate its attention to detail and commitment to operational efficiency. Little optimizations matter far more than it initially appears and they often go un-noticed by the market as they seem small relative to WY’s $28.8B market cap.

Over time, WY’s superior operations should lead to outperformance and it is presently trading at an opportunistic valuation.

Let me begin by digging into the idea that small operating efficiencies can sum to large impacts to the bottom line. I will then follow with data and concrete actions taken by WY that demonstrate their commitment to efficiency.

Large cap companies often get too big for their britches

As companies get larger, small expenditures can start to seem meaningless as their impact on the bottom line becomes a rounding error. However, losing sight of these small expenditures can erode company culture.

  • Maybe they stop comparison shopping when purchasing equipment
  • Maybe they stop focusing on worker efficiency and high productivity workers start to feel overlooked.
  • Perhaps the chain of command gets too crowded with middlemen that might not even be necessary.

Any number of problems like this can occur and they become more prevalent as companies get larger. To get a sense for the scope of such problems we can look at Iron Mountain (IRM) as a case study.

Hundreds of millions of annual savings

As Iron Mountain grew into the world leader in information storage and security its success came with some bloat. Bill Meaney, CEO, recognized this bloat and took to solving it as he launched Project Summit. IRM had a significant amount of redundant middle management, so Project Summit involved a serious trimming down of management along with other efficiency initiatives. Heading into 2022 the estimated savings from the endeavor are $375 million as an annual runrate.

So while each individual unnecessary hire was peanuts for a company IRM’s size, they summed to a huge number. In cutting the fat, IRM found a massive chuck of extra earnings and the efficiency gains are largely responsible for IRM’s outperformance in recent quarters.

IRM stock chart


Weyerhaeuser’s tight ship is getting tighter

As of the latest quarter WY is #1 or #2 of its peer group in EBITDA margin across each manufacturing segment. It also boasts the highest EBITDA per acre among western timberland.

Its efficiency is already quite good, but still has room for improvement. Through 2025, WY is planning to increase annual margins by $175 million to $250 million as per their presentation:

WY targeting price


That would be an additional $0.28 per share of EBITDA at the midpoint. That’s quite a bit and the latest transaction gives me increased confidence that they can do it.

Leasing subterranean ground

Occidental Petroleum (OXY) via its green subsidiary 1PointFive on March 28th leased 30K acres of land from WY with undisclosed financial terms. The carbon capture industry often does not disclose the financial terms, but I think there is enough information here to determine that it is a clear win for WY.

I understand there are multiple viewpoints on carbon capture and I’m not going to provide my opinion on it because from a WY shareholder perspective it doesn’t really matter which side of the debate you fall on. Airbus (OTCPK:EADSY) is paying OXY for 400,000 tonnes of CO2 removal and OXY is paying WY for the land.

The counterparties are massive, so there is minimal risk of default on the lease and while the financial terms were not disclosed, there is reason to believe the rental payments will be substantial.

Quite simply, the scale of this thing is enormous. Up until now, the worlds largest Direct Air Capture (DAC) facility was owned by Climeworks and according to Bloomberg

“The plant will capture 4,000 tons of CO₂ a year, making it the largest direct-air capture facility in the world.”

This new plant from OXY will have capacity to capture 1 million tons per year making it the largest by orders of magnitude.

Per the Announcement from OXY:

“Construction of the first DAC facility is expected to begin in the second half of 2022 in the Permian Basin. When fully operational, the DAC facility is expected to be the largest in the world, with a one-million-tonne annual CO2 removal volume capacity”

Let’s convert that into dollar terms.

Note that DAC is one of the most expensive forms of carbon offset/removal because it scores very well in terms of permanence and additionality. Companies looking to improve their ESG will pay up for DAC because it ranks so highly by third party governance organizations.

Airbus has strict standards on what they will count as a carbon offset per their annual report:

“the carbon offsets need to be certified by the Gold Standard (or Verra for certain projects) and the supplier needs to show proof of how each one of the mentioned criteria were met.”

As such DAC commands a premium price per ton.

According to the world resources institute:

“The range of costs for DAC vary between $250 and $600 per tonne.”

So the 400,000 tonnes for Airbus would cost around $100 million to $240 million. My guess would be that it is toward the lower end assuming there are benefits from the scale.

That is just from the Airbus contract. Presumably in building a 1 million ton annual capacity DAC facility OXY intends to provide the service to companies beyond Airbus. At the $250 per ton rate the annual revenue capacity would be $250 million.

Since financial terms were undisclosed, it is unclear how much of this will go to WY as rent although I think it has to be a fairly substantial number as 30,000 acres is a lot of land, the land needs a specific geological formation to be suitable for capture and there has to be extensive data on the geology of the land.

A pure win for WY

The brilliance of this deal for WY is that it is almost 100% margin.

In owning millions of acres of timberland WY owns this.

A picture containing mountain, outdoor, sky, nature Description automatically generated


But what often goes overlooked is that they also own the ground underneath the forest.

The above ground footprint of the OXY facility is negligible and WY will be able to continue their forestry operations on the 30,000 acres per normal.

This means there is little to no interruption of WY’s existing revenue streams and that the rental stream from OXY is additional revenue.

$100 million EBITDA annually

WY has announced plans to form a $100 million annual EBITDA business through green endeavors. This OXY deal is a good start and it is the right way to do it.

For most companies ESG is an expense line, but for WY it is high margin revenues.

Overall valuation

Weyerhaeuser’s core timber and lumber business easily justifies the valuation. In 2021, adjusted EBITDA of $4.09B facilitated a special dividend of $0.50 per share and a second special dividend of $1.45 per share in addition to their normal dividend of $0.17 quarterly. In 2022 WY increased its regular quarterly dividend to $0.18 and is estimated to get another $3.26B of adjusted EBITDA which would likely cause another large special dividend.

At $38.79, the $2.63 of 2021 dividends represents a 6.7% yield. The $3.26B of expected EBITDA represents an EV/EBITDA of 10.46X.

By either metric WY looks quite cheap. Admittedly, EBITDA is likely to drop a bit post 2022 as I think lumber prices will stabilize a bit lower than they have been so perhaps the yield and EV/EBITDA are a bit less attractive than the above numbers.

That said, there are some significant growth engines in the form of the $175-$250 million annual EBITDA savings from opex efficiency initiatives and the $100 million from high profit margin ESG initiatives.

Given the unpredictability of timber and lumber prices as well as those of manufactured wood products, it is difficult to pencil out an exact fair value, but given the range of where lumber prices are likely to go I think WY looks undervalued.

This speculative EBITDA based valuation is backed up by a far more concrete NAV valuation in which WY is trading at 86% of NAV.

The bottom line

I like owning large tracts of land as it is an asset that has historically perpetually increased in value. WY allows me to buy that land at below fair value and it provides a strong revenue stream while we wait for that land to appreciate. WY operates with a superior level of efficiency which I believe will lead to outperformance over peers and over the broader market.

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