Plum Creek Timber Saws off Excess Supply, Grows Profits

Plum Creek Timber Co Inc (PCL) is the largest owner of timberland in the US, with 7.4MM acres. It enjoys a portfolio of timber that management harvests while keeping an eye on how much value is being realized for the timber sold. The price of wood pulp and paper products has a high coordination with GDP growth/constriction, so during times of low demand, during a weak housing market or economic constriction or delay of purchase orders, management has stepped in to cut "the 2009 harvest by approximately 500,000 tons in aggregate" of their sawlog harvest as per the Q1 conference call.

The projected harvest of ~5MM tons of pulpwood and ~6MM tons of sawlog will constitute the entirely of PCL's 2009 harvest season, providing the profitability to maintain the healthy dividend constituting an ~80 payout rate against net profits. The deferal of 1MM tons of wood to 2010 or thereafter is a play by the management that better economic times are to be expected during Q3 and Q4 of this if not next year. The maturation of these forest in the meantime, coupled with the 500,000 new seeds planted in the northern Michigan regions of Escanaba,&nbsp... and near Marquette this year, will strengthen an already strong balance sheet and yield higher dividends when the GDP starts to move back into the black, compared to the 5.7% constriction in Q1 of 09'.

With 28% quarter-over-quarter price decline in the Pacific Northwest, management is choosing to temper harvesting amidst "mult... lows" according to David Lambert, CFO. The board has made good use of market lulls to use $87MM to repurchase 3.3MM shares, constituing 2% of the outstanding shares at an average price of $26.57 per share, an exercise that has rewarded existing shareholders with a boost in share price to the $34 we find it at today.

A full $50MM is left under board authorization for further buybacks in the future. Compared to many of the overleverage ticking-time-bombs of insolvency we find violently kicking about on the market today, the $355MM cash and a $540MM line of credit provide a $900MM liquidity base ready for the tapping. This positions PCL in an enviable position poised to take further advantage of investment opportunities which may fall into its purview.

The immediate reponse to the ebb in demand is to close mills with the Pablo as the first to go: http://www.missoulian....

Further shut-downs and the reduction in the administrative expenses that go along with them will help PCL weather the historic lows for these wood prices. The mills in Evergreen and Columbia Falls have been closed in the past, and if they are closed, then management, specifically Rick Holiday, pointed to their ease in starting up again (when demand permits) as a likely cash-flow positive venture.

Disclosure: No Positions

Comments

[Eric Boughton_:]

A "$900MM liquidity base ready for the tapping", eh? Where have I heard that before? Oh, yeah, from a bunch of over-leveraged financial firms. ("We have plenty of liquidity," Mozilo said. "We're in very good shape." -9/7/07)

But, of course, since PCL is not a "financial" firm, we shouldn't worry that its $2.73 bln in long-term debt is 5.9 times its FY08 EBITDA, and 6.5 times its FY08 operating cash flow, right? Nor should we worry that PCL generates the vast majority of its "operating" earnings merely by selling land. For example, in the first quarter, PCL made $29 mln in operating profit on selling timber, LOST $13 mln in operating profit on their manufacturing businesses, and made $173 mln operating profit on selling land. That's 92% of operating profit from a completely non-recurring area! The "selling timber" profit didn't even come close to covering the quarter's $38 mln interest expense!

Given these facts, we should probably not worry about whether PCL’s profits are sustainable over the long term, right? I mean, they can continually find land which is worth a lot more than they paid for it, right? Land markets are probably grossly inefficient, and PCL execs are the smartest operators in the world, right? The fact that the majority of PCL's land was purchased in the last 5 years doesn't matter, does it?

For those thinking of PCL as a REIT, consider also that there is a major difference between the earnings reported by other REITs, and PCL. Other REITs depreciate their property (buildings), usually on 30-year schedules. Since buildings don't really depreciate that quickly (unless they are constructed poorly), and in fact can be expected to appreciate slowly as long as they are maintained, other REITs' reported EPS is arguably understated. Not so with PCL: it depreciates NONE of its land, and so its EPS is certainly not understated. This makes PCL's 29 multiple on 2010 earnings just as ridiculous as it sounds.

In a nutshell, each and every year, PCL is making less and less money (and losing money some quarters) from what I would consider its “core” businesses: a) cutting down trees and selling them to saw mills, and b) manufacturing high quality lumber products. Each year, it is desperately attempting to make up for this by selling off its best quality, highest value timberland to real estate developers. When doing so, it is cherry-picking the land it owns at the lowest cost, in order to maximize reported earnings! Eventually, there will be nothing left in this “bag of tricks": the value of PCL's forest land will be judged on its own ability to generate sustainable cash flows. Unless lumber prices once again rise to their bubble levels of early 2004 (or PCL gets lucky and finds "greater fools", like university endowment funds, to buy its land at silly prices), equity holders of PCL are likely to be unhappy with the value of their stock when that happens.

Jun 11 07:40 PM