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071101 Deutsche Bank Report - Weyerhaeuser's 3Q in 200 Words

Deutsche Bank - Equity Research

Weyerhaeuser {Ticker: WY, Closing Price: USD 75.91, Target Price: USD 95.00, Recommendation: Buy}.

* Tough conditions continue, but so does WY restructuring

Given tough conditions we are reducing our EPS est's: Q4 @ $0.37 (was $0.47), FY07 remains $1.60, '08 trimmed from $2.30 to $2.10.  However, ST fundamentals are not driving the stock. We feel the market is underestimating WY's restructuring and see much valuation creation potential in a restructured Weyerhaeuser.  We maintain our Buy rating and target price of $95 based on asset valuation.

* 3Q within expectations

Q3 = $0.55 (excl's series of gains/losses). DB @ $0.45, FC @ $0.50.   Housing-related segments as weak or weaker-than-expected.  C'board/pkg & cellulose both up as expected.   Both timberland & WRECO benefited from q/q gain in land sales. No new insights on either timberland or review on c'board/pkg.

* Housing still softening

(1) Housing-related is ugly & getting worse.  2) No insights on c'bd/pkg process - - - decision seems like late Q4/early 08Q1.  3) Insisting “Tree Act” prospects are good, but passage wouldn't take other options off table.

* Q4 segment guidance

(1) Timber: Q4 EBIT apt to be lower. DB's private timber contacts pointing to “tough” '08 w/ log prices under pressure. (2) Wood: Q4 loss will widen. (3)  Cellulose: Q4 EBIT should be “slightly“ higher. (4) C'board & Pkg: Q4 EBIT = relatively flat.  Strat. review still underway – no further hints.  DB believes at least 3 prospective bidders looking.  (5) WRECO: weaker Q4 & some add'l land sales.

* Valuation/risks: $95 price target is based primarily on our asset valuation

We apply a slight discount to account for cyclical pressures which are currently taking earnings significantly below normalized levels.  The primary risks involve execution risk in WY's transformation strategy.  WY also faces economic risk & interest rate risk, since industrial activity levels influence demand for packaging grades, and the housing market affects both real estate and wood products.