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Summary

  • This article provides a company analysis for Plum Creek Timber and an investment recommendation.
  • To me, PCL is currently overvalued, which is one of the reasons why it's a hold for now.
  • The rebounding housing market will benefit PCL and the timber industry.

Plum Creek Timber (NYSE:PCL) is headquartered out of Seattle, Washington. They specialize primarily in timber. With the housing market on the rebound from the recession, demand for timber will increase; this is a positive sign for PCL. PCL currently owns and manages a diverse portfolio consisting of forests, natural gas, and water. In addition, it manages alternative assets such as conservation, and real estate. PCL operates in nineteen states across the United States, primarily on the East and West coasts, and has the most diverse timberland portfolio consisting of 6.8 million acres.

Furthermore, consistent innovations and acquisitions by management have kept this company ahead of the competition. PCL has also maintained a constant dividend yield of 3.9% and a payout ratio of 157%, keeping investors happy. This report takes an analysis into why an investor should hold PCL for the future, and when an appropriate entry point would be into it if an investor does not currently hold it.

Map of Plum Creek Timber Operations throughout the U.S.

(click to enlarge)

Source: 10-K.

Financial Information

The timber industry is such a niche market. Therefore, PCL has a specific set of direct competitors. They include Louisiana-Pacific Corporation (NYSE:LPX), Potlatch Corporation (NASDAQ:PCH), and Weyerhaeuser Company (NYSE:WY). I will use these companies for further financial analysis comparisons against PCL.

Pricing Trends

According to Figure 2, PCL has had slow growth over the last five years. On the contrary, LPX has seen greater gains over the last five years versus its competitors and the S&P 500. LPX has also seen increases of a greater percentage over the last ten years; this could be contributed to the low price it currently trades at. In Figure 2, there was spike seen on the graph in October, 2011, lasting till the start of 2013. The reason for this spike was that LPX had a new CFO hired, creating short-term confidence in LPX. However, the gains were recognized by the market and LPX pulled back to a new steady state level.

Percentage Price Change in PCL Vs. Competitors

Source: Yahoo Finance.

Revenue Trends

Figure 3 shows all three companies have experienced a downward trend over the last ten years in revenue. This is not a suitable sign for the industry. Note that WY was left out of this analysis because it skewed the graph too much upward and as a result a distinct analysis would have not been possible. However, WY did also show a downward trend in revenues similar to its competitors according to the table below. With the housing market rebounding, demand for timber should be increasing. Therefore, having an increased production of timber should increase revenue. Figure 3 shows decreasing revenue from 2004-2009, and similar to the housing market, all three companies have began to show recovery the last five years.

Revenue Trends PCL Vs. Competitors 2004-13

(MIL)

PCL

LPX

PCH

WY

2004

1,528

2,849

1,351

22,665

2005

1,576

2,599

1,496

22,629

2006

1,627

2,235

1,608

21,896

2007

1,675

1,705

1,654

16,308

2008

1,614

1,376

440

8,018

2009

1,294

1,055

476

5,528

2010

1,190

1,384

539

6,552

2011

1,167

1,357

497

6,216

2012

1,339

1,716

525

7,059

2013

1,340

2,085

570

8,529

Source: Morningstar.

Earnings Trends

Looking at the earnings trends over the last five years, PCL and PCH both show a downward trend where LPX looks to be returning to a level similar to that of what it was five years ago. Once again WY is left out of the analysis because its numbers skewed the data upwards and did not allow for a comprehensive analysis. But, again, WY did show a downward trend similar to that of its competitors. The downward trend for PCL can be contributed to management having increased acquisitions in alternative investments in real estate, oil and natural gas over the last three years. This is reflected in the balance sheet by increased long-term debt and assets. Over the next few years PCL should begin to see increases in earnings beginning and that will be caused by the increased production from the acquisitions.

Earnings Trends PCL Vs. Competitors 2009-13

PCL

LPX

PCH

WY

2009

110

898

-12

2,658

2010

51

863

-53

181

2011

-28

682

-86

176

2012

-97

711

-94

219

2013

-173

888

-76

294

Source: Morningstar.

Operating Cash Flow Trends

LPX and WY have both shown upward trends over the last five years in its operating cash flows, while PCH and PCL have shown little to negative trends in operating cash flows. Although PCL experienced decreases in operating cash flows from 2009-12, 2013 was a positive year in that they were able to generate increased cash flow from operations. This is important because if the operating cash flow number continued to decrease that would be an indication that PCL was beginning to lose its ability to maintain and grow its operations. The reason for this increase over the last year is attributed to the increase in other non-cash items on the statement of cash flows. In addition, with this increase, PCL had no pressure in the ability to cover its annual dividends, and during 2013, the dividend was increased by five percent to show the recovering and improving business conditions as well as the growth in cash flows.

Operating Cash Flow Trends 2009-13

PCL

LPX

PCH

WY

2009

540

61

112

-162

2010

449

48

126

744

2011

374

-40

77

291

2012

353

112

80

581

2013

404

243

90

1,004

Source: Morningstar.

Key Statistics

The key statistics show that PCL has the highest P/E ratio compared to its direct competitors and the industry averages. This statistic coupled with a high PEG ratio and P/S ratio are all concerns and red flags that PCL is overvalued. Furthermore, since the PEG ratio is above one, it means that the P/E ratio is much higher than the growth rate of the company. PCL's PEG ratio of 3.99 means the P/E ratio is growing 3.99 times faster than the growth rate and suggests overvaluation. Furthermore, a PEG ratio above one means that most of the increased growth PCL has experienced is presumably over. PCL currently has a P/S ratio of 6.05, and this is bad because it means PCL trades at 6.05 times its sales. The industry average is 0.84 and PCL's competitors have P/S closer to the industry average. The P/S ratio of 6.05 is also a signal that PCL is overvalued.

PCL has a D/E ratio of 1.75, almost double the industry average. This is discouraging because looking at the last ten years; it has increased from 0.83 in 2004 to 1.75 currently. This means that PCL is having to finance its growth with debt more than previously. This is concerning because PCL increased dividends, but are financing using debt? Comparing the short ratios of PCL versus its competitors, PCL almost has a short ratio of double the next competitor. Therefore, PCL's stock is being shorted at a higher rate than its competitors. This is discouraging as investors are betting against PCL by shorting its stocks at a higher ratio versus its competitors. It has an ROE of 12.42 which is above the industry average and the majority of its' direct competitors. This high ROE means that management is using its equity efficiently, compared to its competitors and other companies in the timber industry.

Key Statistics of PCL Vs. Competitors and Industry

PCL

LPX

PCH

WY

Industry

Market Cap:

7.97B

2.16B

1.70B

19.25B

256.33M

Employees:

1,308

4,200

850

13,700

566.00

Qtrly Rev Growth (yoy):

-0.07

-0.16

0.00

0.02

0.00

Revenue (TTM):

1.32B

2.00B

570.61M

8.56B

454.03M

Gross Margin :

0.30

0.18

0.28

0.21

0.25

EBITDA :

408.00M

181.00M

138.50M

1.66B

19.04M

Operating Margin :

0.22

0.04

0.20

0.14

0.05

Net Income :

188.00M

98.20M

75.44M

579.00M

N/A

EPS :

1.11

0.68

1.85

1.00

0.04

P/E :

40.44

22.35

22.63

32.83

15.21

PEG (5 yr expected):

3.99

8.34

2.63

4.73

1.58

P/S :

6.05

1.08

2.98

2.22

0.84

  • D/E: 1.75 0.62 1.57 0.80 0.90
  • Short Ratio: 12.20 2.40 7.00 7.30 N/A
  • FWD P/E: 27.19 13.20 18.59 19.31 N/A
  • ROE: 12.42 8.52 42.49 10.99 11.30
  • ROA: 3.69 2.08 10.14 5.43 4.90
  • Dividend: 1.76 N/A 1.40 0.88 N/A
  • Dividend Yield: 3.90 N/A 3.40 2.80 N/A

Source: Morningstar, Yahoo Finance.

Recommendation

PCL seems to be managed by an excellent management staff, shown by the valuation metrics and decreasing revenue trends. I currently recommend investors to hold PCL's stock. PCL has consistent innovations and acquisitions emerging through alternative investment areas such as real estate, natural gas and oil. These alternatives are key success factors for PCL to stay on top of the timber industry. Furthermore, because PCL has such an attractive dividend yield and payout ratio, my recommendation of a hold is further strengthened. These high dividends and payouts give investors the opportunity to enjoy more immediate returns.

Entrance Strategy

A buy recommendation on this company would require the valuation for PCL to come back down to a value similar to the industry average. Valuation ratios such as the P/E ratio are currently doubling the industry average for PCL. If the real estate market continues to rebound and construction increases, PCL will become more attractive. Examining the forward P/E, it is lower than the current P/E meaning future estimated earnings are greater than the current. This lower future P/E could provide a good entry point into the PCL stock.

PCL is the first pure play timber investment and first timber REIT enterprise, revealing PCL's management as innovators in the timber industry and continuing evolution as a company. PCL is a leader in recognizing alternative land values, and is expected to grow their wind power and sustainably produce wood fiber for power production. This growth potential is encouraging and provides another reason for entry. If this trend transpires the impact would immensely affect PCL's growth potential for future years.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Source: Why Plum Creek Timber Is A Hold