Tickers in this Article: PCL, WY, LPX, RYN, PHM, DHI, TOL
Timber is a great investment class, and Plum Creek Timber (NYSE:PCL) is one of the biggest and best operators in the field. So that's it then, right? Just buy Plum Creek shares and hang on for the long haul.

Actually, for some investors that may not be bad advice. Timber is a renewable resource but the long-term demand outlook is very solid and the available land base is shrinking. Still, for investors who cannot stomach the thought of 20% short-term losses, timing is more important and there are factors beyond the long-term timber demand outlook to consider. (For more, see Timber Investments Cut Down Portfolio Risk.)

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Still a Rough Market in the First Quarter
As Plum Creek's results show, the tough times are not over yet in the timber market. Revenue dropped 13% from last year, led by a 37% decline in real estate sales. In the timber business, the company did benefit from better pricing in the Northern segment, which resulted from the Chinese demand. Business is still tough in the South, though, and overall, timber revenue fell 7%.

Not surprisingly, the company's margins are under pressure. The company still has to face rising costs and that takes a toll on profitability. Overall, operating income fell 37%, as margins declined slightly in real estate and much more significantly in the Southern timber segment. Northern timber margins actually improved, though they are still well below the company average.

Pricing Will Get Better ... Eventually
In some markets, sawlog prices are near multi-decade lows. For this quarter, Plum Creek saw realizations in the South drop 13 to 23%, depending on the type of timber. The picture is a bit better in the Northwest, though, as prices for sawlogs jumped 17% from last year.

As investors might imagine, this is an industry-wide phenomenon. Weyerhaeuser (NYSE:WY), Louisiana-Pacific (NYSE:LPX) and Rayonier (NYSE:RYN) are all facing the same sort of pricing environment, though each company has a different portfolio of timber assets and ancillary businesses, and they are not all engaged in real estate sales to the same degree.

Right now, exposure to Northwestern timberlands and Asian markets is a good thing. Chinese demand for building materials continues to run hot, and the rebuilding in the wake of Japan's Tohoku earthquake is likely to lead to even more demand. Several Canadian timber companies (Western Forest Products, West Fraser, International Forest Products, and Canfor) have already enjoyed solid runs, and that could support higher prices for some time.

The picture for the rest of the U.S. timber market is more complicated. Housing is clearly still weak, but construction is running at a rate that is insufficient to meet demographic needs. That means that there will quite likely be an increase in building activity eventually, and that will boost prices. But a quick look at leading builders like Pulte (NYSE:PHM), DR Horton (NYSE:DHI), and Toll Brothers (NYSE:TOL) suggests that it won't be a fast turn anytime soon.

The Bottom Line
Plum Creek currently has a relatively unattractive dividend and valuation ratios, but that is pretty typical for a cyclical business in a tough stretch. That said, cash flow modeling still leads to the conclusion that Plum Creek is pricey. For really long-term holders, that probably does not matter much, but anybody buying today needs to be able to take a 10 to 20% pullback in stride.

For investors looking for more of a bargain, Weyerhaeuser looks like the better pick today, though Canfor could still have a little room left to run. In any case, investors should realize that timber investments demand some patience and a long-term horizon - they don't often lend themselves to easy fast-money trades. (For more, see The Value Investor's Handbook.)

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