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Taking Multiple Cuts At Plum Creek
These are strange times for companies trying to operate in the timberland industry. Although timberland theoretically offers the advantage of allowing companies to sit tight and literally let their assets grow, the reality for public companies is the expectation of ongoing dividend payments and growth that necessitates active management. As one of the go-to names in the timber business, Plum Creek (NYSE:PCL) is a mixed bag of good and bad news for investors today.
The Quarter That Was
Expectations were not all that high for the third quarter, but Plum Creek disappointed nevertheless. Performance in the actual timber business was not too bad - sawlog prices were higher than in the year-ago period, although still not at a level that is all that attractive. Due in part to uninspiring market conditions, then, Plum Creek has pulled back on its harvest levels.
The bigger issue, though, was in the real estate business. Not surprisingly, demand for land for housing remains weak and revenue and operating profits tied to real estate sales have dropped precipitously, draining away a high-margin source of business. Due in part to the ongoing slump in real estate, Plum Creek took down numbers for the fourth quarter.
The Road Ahead
Plum Creek has been active in shuffling its assets, looking to sell wherever the highest value may be. That has led the company to sell about 15% of its acreage over the past four years, and the company has previously indicated that it could take over a decade for harvest levels to get back to the 20 million ton level. At the same time, investor interest in timberland has pushed up prices and made it harder for companies to add acreage at attractive prices. (For more, check out Timber Investments Cut Down Portfolio Risk.)
Another point of concern could be Plum Creek's relative efficiency. Not all timber companies are the same, and comparables like Rayonier (NYSE:RYN), Weyerhauser (NYSE:WY), Potlatch (NYSE:PCH) and Canfor have different business mixes (some are directly involved in lumber production, others specialty fibers and/or pulp). Nevertheless, Plum Creek generates considerably less EBTIDA per acre of timberland than these other companies.
On the other hand, timberland still has value and the market does not seem to be giving Plum Creek its due. Even though industry-watchers have bemoaned the low price of a recent deal done by International Paper (NYSE:IP) at about $1,200 per acre, the market is currently valuing Plum Creek's holdings at about $855 per acre. That's still quite a bit higher than the value given to Weyerhauser's timberland (again, acknowledging that they are not strict apples-to-apples comparables), but below Rayonier, Potlatch, and Deltic (NYSE:DEL).
The Bottom Line
So, investors have an interesting dilemma with Plum Creek. The dividend yield is not bad relative to the normal level of the past 10 years, but the company is not garnering as much from its asset base as investors might hope. And yet, the stock may be a bargain if investors do want to see ownership of shares as a pass-through means of owning timberland at below-market prices. Given that these are still rough times for builders and lumber demand, this may be an opportunity for investors to buy into a proven asset class at attractive levels. (For more, see Investing In The Woods.)
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The Quarter That Was
Expectations were not all that high for the third quarter, but Plum Creek disappointed nevertheless. Performance in the actual timber business was not too bad - sawlog prices were higher than in the year-ago period, although still not at a level that is all that attractive. Due in part to uninspiring market conditions, then, Plum Creek has pulled back on its harvest levels.
The bigger issue, though, was in the real estate business. Not surprisingly, demand for land for housing remains weak and revenue and operating profits tied to real estate sales have dropped precipitously, draining away a high-margin source of business. Due in part to the ongoing slump in real estate, Plum Creek took down numbers for the fourth quarter.
Plum Creek has been active in shuffling its assets, looking to sell wherever the highest value may be. That has led the company to sell about 15% of its acreage over the past four years, and the company has previously indicated that it could take over a decade for harvest levels to get back to the 20 million ton level. At the same time, investor interest in timberland has pushed up prices and made it harder for companies to add acreage at attractive prices. (For more, check out Timber Investments Cut Down Portfolio Risk.)
Another point of concern could be Plum Creek's relative efficiency. Not all timber companies are the same, and comparables like Rayonier (NYSE:RYN), Weyerhauser (NYSE:WY), Potlatch (NYSE:PCH) and Canfor have different business mixes (some are directly involved in lumber production, others specialty fibers and/or pulp). Nevertheless, Plum Creek generates considerably less EBTIDA per acre of timberland than these other companies.
On the other hand, timberland still has value and the market does not seem to be giving Plum Creek its due. Even though industry-watchers have bemoaned the low price of a recent deal done by International Paper (NYSE:IP) at about $1,200 per acre, the market is currently valuing Plum Creek's holdings at about $855 per acre. That's still quite a bit higher than the value given to Weyerhauser's timberland (again, acknowledging that they are not strict apples-to-apples comparables), but below Rayonier, Potlatch, and Deltic (NYSE:DEL).
The Bottom Line
So, investors have an interesting dilemma with Plum Creek. The dividend yield is not bad relative to the normal level of the past 10 years, but the company is not garnering as much from its asset base as investors might hope. And yet, the stock may be a bargain if investors do want to see ownership of shares as a pass-through means of owning timberland at below-market prices. Given that these are still rough times for builders and lumber demand, this may be an opportunity for investors to buy into a proven asset class at attractive levels. (For more, see Investing In The Woods.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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