Seeking Alpha
Long only, value
Profile| Send Message|
( followers)  

Plum Creek (NYSE:PCL) announced 3rd quarter 2013 results on October 28 in which earnings for the quarter beat expectations by $.04. As I have said in previous articles, when it comes to timber companies, I prefer to look at year to date numbers rather than quarterly data. This is because timber and forest products companies have a certain amount of seasonality to their businesses. In addition, they also can shift harvest levels and mix from quarter to quarter, as they attempt to play the market. Also, their real estate business is quite lumpy. For these reasons, I believe YTD numbers are more meaningful.

Let's look at PCL's 2013 YTD numbers. Year to date, Plum Creek's sales are up only 2.4% from 2012. Earnings are up 40% mainly from lower costs and slightly higher sales. EBITDA is up 1%, and cash from operations 35%. Distributions paid used up about 66% of the cash from operations. Plum Creek's long-term debt is unchanged at $2.598 billion, however, short-term debt is up $403 million to $509 million. Total debt to equity ratio is around 2.5, the highest of the timber REITs. Since the first of the year, Plum Creek has invested $236 million in new timberland and mineral rights acquisitions.

Year to date, PCL unit prices are up about 4.5% versus about 20% for the S&P. The total return, with dividends is about 7.5%. The yield right now is about 3.5%, the highest of the timber REITs. I have noticed that timber REIT unit prices seem to always run ahead of financial results. I attribute this to investors betting on the come, as far as housing starts are concerned. As of today, PCL is about 15% below its 2013 high.

If we look at Plum Creek's business units, EBITDA for timber was up 9% over last year. Wood products EBITDA was up 14%, and real estate down 8% over 2012. As a percent of the whole, timber accounted for 38%, wood products 11%, real estate 48% and 3% other. Housing starts for 2012 were 781,000 and for 2013, estimates are that housing starts will be just under 1,000,000. Overall, housing is rebounding although at a much slower pace than most were expecting. This means Plum Creek still has a way to go until housing starts reach about 1.5 million, which is the long-term trend.

If you compare Plum Creek's YTD numbers with Weyerhaeuser's, (NYSE:WY) of which I just wrote about in a previous article, PCL looks anemic. Why should this be? A number of factors could explain the difference. For one thing, Weyerhaeuser has a 40% exposure in the Pacific Northwest while Plum Creek has only 7% exposure in the region. The Pacific Northwest export market is where all the action has been in timber for the past three years. If we take out the 14% acreage in the inland west, where prices have also recovered somewhat, this means that Plum Creek has a 79% exposure outside the west, mainly in the South, where sawtimber prices have still not recovered. What is really holding Plum Creek back is southern pine sawtimber prices. In addition, Plum Creek's lumber business is small, compared to Weyerhaeuser, and more concentrated in boards and MDF versus dimensional lumber used in housing.

As many of you know, along with Q3 results, Plum Creek announced the acquisition of 501,000 acres of timberland from Mead Westvaco. I believe with this acquisition, Plum Creek will regain the top spot from Weyerhaeuser in acreage for the timber REITs. The lands are in Alabama, Georgia, South Carolina, Virginia, and West Virginia. The price is $869 million, or $1,735 per acre. In addition, Plum Creek in entering into a 50% joint venture with Mead Westvaco on 87,000 acres of development land in South Carolina for $139.5 million, and a 5% stake in a joint venture with Mead Westvaco on 22,000 acres of development land in South Carolina for $12.5 million. They are also acquiring most of the mineral rights for an additional $65 million. All totaled, the deal is worth $1.1 billion. Plum Creek will pay Mead Westvaco $226 million in cash, and pay the remaining with an $860 million installment loan over ten years. To raise cash for the deal, Plum Creek will issue 14.1 million new units, which will dilute their units by about 8.5%.

As I stated above, what is really holding Plum Creek back is southern pine sawtimber prices. With this acquisition, Plum Creek is essentially doubling down on the bet that a southern pine sawtimber price recovery is just around the corner. Southern pine sawtimber prices are hovering around $35 per ton. When I worked in the South back in the 1990's prices were over $50 per ton. My opinion is that this is a good bet. When housing starts move up lumber demand will follow. The Pacific Northwest and the Inland West are at or near full capacity now. Canada will not be able to supply us at the levels they have in the past because they are exporting lumber to China. In addition, Canadian harvest levels are falling because of the mountain pine beetle epidemic that they have been fighting for years now. That means that the additional supply will have to come mainly from the South.

With the recent pullback in unit price, this may be a good time to pick up some PCL at a discount. You get a nice dividend, and if you agree with PCL double down bet on southern pine sawtimber prices, you may get a nice ride up over the next year or so.

Source: Comments On Plum Creek's Q3 2013 Results