Plum Creek Timber Co. Inc. (NYSE:PCL) is one of my oldest portfolio holdings, owing to a research project I did on TIMOs back in late 2004. As I had personal experience in this industry, I have had an affinity for investing in the hardwood industry every since. One of the drawbacks to TIMO investing is that, like hedge fund investing, TIMOs have high investment minimums and are closed to investors that are not of high net worth. Alternatively, an investor wanting to direct invest and assemble their own portfolio may have to spend as much as $10-$15 million for proper diversification.
The answer in my case was to identify available equities and ETF's that would replicate the returns that a TIMO investment could provide while retaining the benefits of the equity/etf vehicle type. While Timber is often ignored by investors who are more attracted to mainstream bond and stock investing, Timber has been a consistently viable niche. In general, TIMO investments are highly illiquid, and TIMO returns are not planned on a calendar cycle, rather they are achieved over long term appreciation of the growth timber, periodic harvesting, and the forestland real estate value, and often the bulk of returns do not occur until the end of the fund cycle, when the land is resold.
What particularly drew me to PCL is that, in comparison to it's peers at the time, PCL had a more agreeable yield and price relative to the 52-week high, a situation that exists even now, so given PCL's positive earnings release yesterday I have decided to reappraise my PCL thesis and compare to a few of their industry peers.
Q1 Earnings Release:
PCL beat analyst expectations in Q1 2014, posting 17 cents per share earnings and reporting year over year growth in three of 5 business segments. The Southern Resources segment reported operating profit of $31 million during Q1 2014, up about 29.2% year over year. The Northern Resources segment reported operating profit of $16 million during Q1 2014, up 45.5% year over year. The Energy and Natural Resource reported operating profit of $6 million during Q1 2014, up 20.0% year over year. The Real Estate segment was down 73.3% in Q1 2014 compared to the same quarter in 2013 but this was due to the inclusion of a large non-strategic lands sale in the same quarter last year. The Manufacturing segment recorded a 10% decline in Q1 2014 compared to Q1 2013 in large part due to severe weather that hampered plywood sales.
Review of 2013 Results:
Year on year PCL had revenues remain flat at 1.34bn, though PCL grew net income 5.42% from 203.00m to 214.00m. A reduction in the cost of goods sold as a percentage of sales from 70.13% to 68.66% was a component in the net income growth despite flat revenues. The Gross margin was 31.34%, operating margin was 21.72% and net profit margin was 15.97% while return on equity was 14.01%. Year on year, both dividends per share and earnings per share excluding extraordinary items growth increased 3.57% and 3.44%, respectively, and PCL sports a 5 year average dividend of 4.21%. In 2013, PCL increased its cash reserves by 21.63%, or 77.00m. The company earned 404.00m from its operations for a Cash Flow Margin of 30.15%. In addition PCL generated 202.00m cash from financing while 529.00m was spent on investing. Plum Creek Timber Company Inc has a Debt to Total Capital ratio of 66.67%, a lower figure than the previous year's 212.43%. The current ratio is 1.08 and the quick ratio is .983, both of which denote a strong balance sheet.
While there are several peers of PCL, only 4 of which are US stocks with comparable metrics to use. Canadian listed stocks I have left out are Canfor Corporation (CFP.TO), Stella-Jones Inc. (SJ.TO) and West Fraser Timber Co. Ltd (WFT.TO). All the below metrics are taken from Yahoo Finance.
PCL: Even with the current yield of 4.10%, PCL misses my current accumulation screen by sporting a PEG ratio of 3.84. Currently trading near twenty percent off of the 52 week high and a price to book of 4.16, PCL has a consensus target price of 45.56. The current Analyst Mean Recommendation Score is 2.4, which indicates that analysts are generally positive on PCL. The short ratio of 7.5 could be a cause for concern or may indicate a good deal of bearishness going into Q1 Earnings.
Weyerhaeuser Co. (NYSE:WY): The largest and most well-known name in the Timber products industry, WY sports a current dividend yield of 3.10% and a PEG of 4.45, both numbers not as favorable as PCL. Additionally, WY is trading at near 10% below the 52-week high, another negative to a strategy of accumulation at this time. The price/book of 2.57 is significantly better than the PCL P/B and the short ratio is 2, more than three times better than PCL. The current Analyst Mean Recommendation Score is 2.3, slightly better than PCL.
Rayonier Inc. (NYSE:RYN): RYN sports the highest yield of this group, 4.40% at the current level, but a double digit PEG ratio (47.2) and price/book of 3.49, nearly as high as PCL. RYN is trading at more than 25% below the 52-week high, which contributes to it's slightly higher dividend, and has a target price of 49.60, a little more than $5 above the most recent close. The current Analyst Mean Recommendation Score is 2.5, slightly worse than PCL and WY, and has a short ratio of 2.8.
MeadWestvaco Corporation (MWV): MWV has a current yield of 2.60%, and trades at a little more than 3% below the 52 week high. The PEG ratio, however, is 2.09, which would put it within my current accumulation screen, and the Price/Book is 1.67, by far the best of the dissected stocks today. The Analyst Mean Recommendation Score is 2.1, also the leader of the four stocks I have looked at with this analysis. The short ratio is 4.4, which could be indicative of negative market expectation going into tomorrows earning release.
While I am still positive on my current holdings in PCL, I would not likely be adding to the position at this point due to it's failure in the PEG and Price/Book metrics. While I am generally positive on all four stocks above I am especially strong on MWV. MWV has positives going for it in almost all of the metrics I use to screen my holdings and potential holdings. Provided that MWV does not report completely falling apart in Q1 2014, I would definitely consider bumping it up into my main accumulation stocks in the future.
Disclosure: I am long PCL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.