Filed Under:
Tickers in this Article: PCL, RYN, WY, UFPI, LPX, RKT, PKG, BKI, STO, NRP, PVR, PCH, LOW, GLT, KMP
Timberland may be a great investment class, but it does not automatically follow that Plum Creek Timber (NYSE:PCL) is a great investment at any and all times. While these are indeed still down days for the residential building market (a major consumer of timber from saw logs) and real estate in general, Plum Creek is not looking all that cheap. Such is the dilemma when investors fully buy into the underlying soundness of a company's core business.

TUTORIAL: Commodity Investing 101

Some Good, But More Bad in Q2 Results
Plum Creek surpassed analyst expectations for second quarter revenue growth, but the company's 10% growth was bulwarked in large part by real estate sales. Timber revenue fell 5%, while revenue from timberlands sold for real estate jumped 84%. Sawlog volume was weak in general - hurt by bad weather in the Northwest and good weather in the South (which pressured prices and led Plum Creek to hold off on harvests). Prices were higher for Northwest products and lower for Southern, and the company saw more than one-quarter of its Northwest harvest go to China.

Profits were so-so; core timber profitability fell, but the company did see more of those high-margin real estate sales. All in all, reported operating income rose more than 12%. Investors should take note of one warning sign - based on the cash flow and income statement so far to date, Plum Creek is funding its dividend payments through those real estate sales, and that is not a sustainable practice. What's more, prices realized in real estate continue to be below prior company guidance, so investors may need to reevaluate their outlook.

What's The Land Worth?
Many analysts (including the author) have tried to analyze the EBITDA earned per acre by timberland operators like Plum Creek, Rayonier (NYSE:RYN), Weyerhaeuser (NYSE:WY) and Potlatch (Nasdaq:PCH) over the years as a way of explaining or projecting appropriate valuations. While the numbers have varied from analyst to analyst, a consistent theme is that Plum Creek has been on the lower end of EBITDA productivity per acre.

A lot of that would seem to derive from the geographic exposure of the various companies - holdings in the Southern U.S., for instance, don't generally feed Chinese demand. Perhaps this will improve as the real estate market improves (the Southern U.S. is seeing net population inflow), but Plum Creek will have to prove to the Street that it can derive better financial yields from its acreage.

Timber Yesterday And Timber Tomorrow ...
The good news/bad news of the timber business is that companies can afford to wait for better prices. Or at least they can wait to the extent that they are covering their operating costs and dividend obligations. Unfortunately, nothing in news from companies like Universal Forest Products (Nasdaq:UFPI), Lowe's (NYSE:LOW) or Louisiana-Pacific (NYSE:LPX) suggests an immediate turnaround in the demand and price equation for timber.

That means that investors may be better served looking for ideas in the paper, packaging and fiber space. Companies like Rock-Tenn (NYSE:RKT) and Packaging Corp. (NYSE:PKG) have looked interesting of late, as have Buckeye Technologies (NYSE:BKI) and Glatfelter (NYSE:GLT).

The Bottom Line
For Plum Creek shares, though, it still does not look like a great time to buy. The company's current dividend yield is on the lower end of the historical range, and it is hard to argue for this name as an income idea over other resource plays like Penn Virginia (NYSE:PVR), Natural Resource Partners (NYSE:NRP), Statoil (NYSE:STO) or Kinder Morgan Energy Partners (NYSE:KMP). Timberland valuations do seem more likely to go up than down in the coming years, but Weyerhaeuser and Rayonier look like better timber options at today's prices. (For related reading, also see Timber Investments Cut Down Portfolio Risk.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center