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April 03, 2009 – Comments (6) | RELATED TICKERS: PCL

Besides having a great sounding name, Plum Creek Timber (PCL) owns over seven million acres of timberland throughout the US.  PCL’s primary source of revenue is selling wood and wood products.  Additional revenue is generated from minerals, natural gas and leasing rights-of-way.  The company owns four mills (one is being closed in 2009), two plywood plants, two medium density fiberboard plants and two lumber remanufacturing facilities.  Buying and selling property as opportunities present themselves generates additional revenue. 

PCL is structured as a real estate investment trust (REIT), which means nearly all the taxable income gets distributed to shareholders.  One interesting aspect of this REIT is that nearly all the distribution is capital gains – a plus for investors who may be worried about tax rates on dividend income going up.  Having most of the income treated as capital gains gives the company some flexibility in the distributions since it isn’t ordinary income.

Lumber, plywood and fiberboard production were all below planned levels and well below capacity for 2008 due to low demand for wood products.  Despite weak demand and below plan production levels, PCL was profitable in 2008.  The company earned $233 million or $1.37 per share and paid out $1.68 per share in dividends.  Cash flow from operations was $420 million for the year.  In addition, diluted shares outstanding were reduced from 172.3 million at the start of 2008 to 166 million by year-end.  One advantage to growing trees is unsold product doesn’t go to waste.  Those trees are still there waiting to be harvested and sold when demand picks back up.

The balance sheet lists $4.8 billion of assets vs. $3.2 billion of liabilities for just under $1.6 billion of book value.  That puts book value per share at a little under $10.  At today’s close of just under $30, price-to-book is about 3.  Note on book value, PCL carries timber and timberland at $3.6 billion on the balance sheet, which values the 7+ million acres at about $500/acre.  That valuation seems very low, so the true book value is probably quite a bit higher than what’s carried on the balance sheet.

The stock has run from just under $24 per share earlier in March to about $30 per share.  The 52-week range is $22.88 - $60 per share.

Positives:
Good yield:  At $30 per share, the dividend yield is 5.6%.

PCL has been profitable over a horrible market for its products.

Should do extremely well when wood products demand picks up.

PCL has exceeded analysts’ earnings estimates for each of the last four quarters.

Nature does most of the work and if demand is bad, the trees will just keep growing.

Steady decrease in shares outstanding over the past several years.

Land and timber values may be higher than what’s on the balance sheet.

Negatives:
Earnings projections going forward are negative which could lead to a dividend cut.

Stock looks expensive compared to others in the Diversified REIT Industry.   Among the diversified REIT competitors, it has the highest P/B, dividend yield is below average and PE is above average.

Summary:  The idea of owning a slice of vast timberlands is very appealing.  And it makes sense to establish a position in something connected to housing before new home construction turns up, but this stock looks expensive.  I’m a cheapskate and 3x book and over 21x trailing earnings is tough to justify.

From a CAPS perspective, I don’t want to green thumb it at this price, but red thumbing a well managed, high yielding stock can be very hazardous to a CAPS score. 

For now, it goes on a watchlist looking for a little better entry point.

6 Comments – Post Your Own

#1) On April 03, 2009 at 10:33 PM, devoish (97.09) wrote:

You read my post about carbon trading, and the nightmare it will be. Carbon offsets will likely come, in part, in the form of not cutting down trees. Increasing the land and timber values. Right now in europe one ton of CO2 affsets is valued at just under $15. Each acre will absorb one ton of CO2 each year, which adds 105mil to each year they do not cut the trees down. Before the US mandates trading.

Of course the acres, depending on your source, absorb 1-2 tons each. Only the acres with trees are eligible and only if you pinky swear you are going to cut them down if you don't get the carbon offset. etc.etc.etc...

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#2) On April 03, 2009 at 10:48 PM, chevionUSA (< 20) wrote:

i get wood wehn i hear PCL. i don't approve many companies but i like these guys. The CEO is not as corrupt as other CEOs.

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#3) On April 03, 2009 at 10:54 PM, rd80 (98.00) wrote:

I thought about including the possibility of revenue from carbon credits in the writeup after reading your blog.

Since most of the wood products aren't burned they wouldn't release CO2 after being harvested.  If new trees are planted, they continue absorbing CO2.

A strong case could be made that harvesting the trees and replanting is at least as good a sequestration approach as just letting them grow, as long as the timber is processed into something that's going to be wood indefinitely.  I'm sure the regulations wouldn't allow that, but I'd be surprised if PCL doesn't have a team of scientists and attorneys working on it.

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#4) On April 03, 2009 at 10:57 PM, goldminingXpert (29.60) wrote:

Carbon credits are going to go away once the depression really hits. Once people start rioting, all the nonsense over global Al Gore induced hot-air warming will fade away and we'll start focusing on real issues--such as 15% unemployment.

That said, this is a fine ETF but you're trying to hard. Myriad oil/nat gas plays are better. Something like BWP returns an easy, safe, dependable 10% a year yield. Don't overthink this.

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#5) On April 04, 2009 at 8:20 AM, leftfield4sure (< 20) wrote:

Forestland is not always harvested using a clear cut principle.Sustainable foresrty which Plum creek also uses to manage their lands maintains and grows their resource.The selective harvest approach is the only real option in a hardwood forest since this forest self regenerates.Trees that fall down and rot on forest floor generate as much co2 as if burned.So here is a resource that through growth of timber adds 5% per year;put that on a 15 year rotation use selective harvest add carbon credits hmm sounds like a cash machine.......

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#6) On April 04, 2009 at 8:21 AM, leftfield4sure (< 20) wrote:

Forestland is not always harvested using a clear cut principle.Sustainable foresrty which Plum creek also uses to manage their lands maintains and grows their resource.The selective harvest approach is the only real option in a hardwood forest since this forest self regenerates.Trees that fall down and rot on forest floor generate as much co2 as if burned.So here is a resource that through growth of timber adds 5% per year;put that on a 15 year rotation use selective harvest add carbon credits hmm sounds like a cash machine.......

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