Conditions in the timber industry haven't been getting better with any particular speed lately. Although multi-family housing construction is extremely strong, the single-family building and residential real estate development markets, that are so important to Plum Creek (NYSE:PCL), went basically nowhere in 2011. Although most analysts expect 2012 to be the low for the cycle, investors may yet want to ask themselves if Plum Creek is the way to play the eventual rebound.
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A Decent Fourth Quarter, Relatively Speaking
Fourth quarter results were not that great for Plum Creek, but there was no particular expectation that they would be. Reported revenue dropped 12% as a 38% growth from the Northern business and 14% growth in manufacturing partially offset a 4% decline in Southern and a 40% decline in revenue from real estate operations.
Pricing and volume were fairly mixed. Plum Creek definitely saw a sizable jump in volumes from Northern (24%; especially in sawlogs), while volumes in Southern and manufacturing were mostly flat. Pricing continues to be dodgy. Finished products like lumber and plywood saw little year-on-year change in price, while price growth from the Northern forestry business was up in the mid-single digits.
Plum Creek basically held the line on profits. Operating income dropped 13% as reported and the operating margin slid about half a point. Northern margins improved significantly, but slid in the Southern business. The manufacturing business saw some improvement, and the company is doing better than comparables like Louisiana-Pacific (NYSE:LPX) and Universal Forest (Nasdaq:UFPI). (For related reading, see Understanding The Income Statement.)
Will 2012 Be the End of the Bad?
Management's commentary on 2012 was not really out of line with recent quarters, but there are a few tea leaves to read all the same. On first blush, guidance looks pretty bad - management talked a range for earnings from $1 to $1.25, which is definitely weak relative to the $1.33 average analyst guess. That said the actual cash guidance (which is far more important for a cash/yield play like Plum Creek) was much, much better.
There were also a few tidbits that should interest investors. The company is seeing Chinese log demand pick up and could be sending about 20% of its Northern production across the Pacific. It also sounds like the real estate and housing markets have washed out, and interest is slowing starting to pick back up.
Good, Bad and Ugly
The best news on Plum Creek may be that 2012 is shaping up as the bottom of the cycle and that demand in construction and real estate development should begin to recover. It's also definitely a positive for the company that it is well-placed to service Chinese demand.
Now for the bad and ugly. Although it seems like an unofficial rule that every write-up on Plum Creek mentions that it's the largest timberland owner in the U.S., there's a difference between quantity and quality. Rival timber operators including Rayonier (NYSE:RYN) and Weyerhaeuser (NYSE:WY) have more productive timberlands than Plum Creek and earn more from those lands.
Plum Creek has instead focused to some extent on lands that have that real estate kicker; sacrificing timber value for potential real estate sale value. It's not automatically a bad thing, but it does mean that Plum Creek is not the same sort of company as Rayonier or Weyerhaeuser.
The Bottom Line
Plum Creek does not look all that especially cheap today; the company's dividend yield has frankly not changed all that much in recent years. Unfortunately, Plum Creek is often valued on the basis of recent private timberland sales - a metric that most individual investors cannot track easily or cheaply. Recent transactions suggest that Plum Creek's holdings are 20% undervalued, but investors would do well to remember those discrepancies in productivity. All in all, while Plum Creek has a respectable yield and is probably not overpriced, but it's not a great bargain today either. (For related reading, see The Power Of Dividend Growth.)
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.