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Tickers in this Article: PCL, WY, RYN
The volatility in the markets and the growing risk of inflation are issues that always raise investor concerns. This poses an interesting puzzle for investors as to where they might hide their investment dollars.

During this period of market volatility, investor have been pouring money into the commodity markets. One way for an investor to take advantage of these trends is through the purchase of stocks like Plum Creek Timber Company Inc. (NYSE: PCL). PCL offers equity-like returns, portfolio diversification and above market dividend yield through its leadership position in timberland management.

Land Ho!
Through its ownership of 8.2 million acres across 18 states, PCL has commodity assets that over time do not correlate to traditional asset classes and provides a hedge against inflation. The size of land ownership makes PCL the largest private timberland owner in the US. Due to its unique place in the timberland industry, PCL can also add to its acreage as integrated firms trim their exposure to volatile commodity markets.

PCL has grown to its present 8.2 million acres from 1.4 million in 1989. In addition to its normal timber operations, PCL sells portions of its acreage as the real estate value exceeds to economic use as timberland. This activity bolsters PCL's margin and provides large amounts of cash flow to PCL.

Housing Fallout
PCL reported fourth quarter 2006 earnings of $69 million or $0.39/share, up from $0.36/share a year ago. Revenue saw a slight decline by about 3% to $379 million. For 2007, PCL recently lowered its guidance for the first quarter and the full year. In Q1, PCL expects to earn from operations $0.18-23/share and $1.40-1.60/share for the full year. Prices in lumber, plywood and oriented strand board are weakening due to lower residential construction activity. Consequently, PCL expects to reduce harvesting by 5-7%. Overall harvests are estimated to reach 19.5-20.5 million tons of lumber.

Cash Strong
PCL will still have strong cash flows to continue to buyback shares and pay an above market dividend. In Q4 2006, PCL repurchased 5.2 million shares at an average cost of $35.16/share. PCL has approximately $90 million remaining under its current authorization. PCL's debt to capital ratio is 52.7% and had $273 million in cash at the end of the year.

PCL, currently is not inexpensive by its historical standards. It is currently traded at the top end of historical P/E range. On price to book of 3.2 times below, PCL is below its average annual range of 5.4-8.5. It is difficult to compare PCL to any peer group. It operates in a manner similar to a REIT but does not report earnings in the typical REIT fashion, funds from operations. From time to time there has been speculation of a takeover which pushes up the price of the stock. The long term growth rate for earnings is around 8%. The nearest competitors as a paper company are Weyerhaeuser Co. (NYSE: WY) and Rayonier Inc. (NYSE: RYN). RYN has similar total revenues but its margins are much lower and produce about only half the operating income. WY is significantly larger with nearly 4 times the sales as PCL but only earns slightly more than twice the operating income. PCL and RYN have similar dividend yields of 4.4%, higher than WY's 3.0% and the markets 1.8%.


A Plum Stock
PCL had sold down nearly 10% from its recent high of $41.50 after reducing its guidance. There remain some risk in the stock as the housing market may not yet have bottomed. The true value is the timberland and real estate values which serve as an inflation hedge. As investors await the bottom, they are paid a solid dividend and the firm continues to use its strong cash flow to buyback shares and return shareholder value. Investors should take advantage any dips in the stock price to establish a position in an equity that gives them exposure to a low correlating asset and hard asset characteristics to their portfolio.

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