Searching the forest for income
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.
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.
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.