Plum Creek Timber Rewards Patience

I have been a fan/holder of Plum Creek Timber (PCL) for clients since before I started my web site. I've written about it a few times over the years and I just continue to hold it.

I've known about the stock since my days at Lehman Brothers (1989-1991) when it was still an MLP. I think I first read about the diversification benefits of timber/lumber sometime in the mid 1990s.

The chart above (click to enlarge) shows PCL in blue compared to Rayonier (RYN) in red and the S&P 500 (SPX) over the last year. In the last few years, PCL has had periods where it has been ahead of RYN and periods where it has lagged RYN. Ditto the S&P 500.

What I think is important is that in the last 12 months, while SPX has dropped about 10% PCL is up about 10% - plus, it has paid a decent dividend. If I had had RYN instead it would have delivered almost the same effect.

Most of the time PCL doesn't do a whole lot, but this has been a period where holding it paid off. That it might lag at other times, like maybe if the stock market is doing very well, is ok too. The reasons to hold it are for the dividend and the hope it can zig when equities zag.

If you own stocks or other products that you hope deliver what PCL has done over the last year, you should realize there will be periods where it is dead money. But assuming the story has not changed, it is likely that selling out because it is dead money for a while will likely turn out to be a mistake.

Comments

[Greg Pinelli:]

Roger..in your opinion what separates PCL from others? What are its greatest strengths for the future?

2008 Jun 02 09:36 PM

[whidbey:]

Thanks Roger. I was going to sell, the housing market being what it is, but I remain hopeful that PCL will plunge and I can buy more. I don't know why I hope to do that, but I do believe there will a housing recovery after the comet. I agree with you liking PCL is irrational at at best. But then I hold BRK and it is dead money too so it perhaps I am in a rut.

2008 Jun 02 10:04 PM

[CT Programmer:]

I too hold PCL because it is one of Jubak's Picks on MSN. I bought it at about $43 in January 2008, but in March you could have picked it up in the high $30's. I'm up about 8.8% so far with dividends, but I consider any appreciation this year to be a fluke. This is a long-term investment. It's current PE is high at just shy of 30, and the fwd PE is at 41, but that's with dramatically low earnings currently and earnings trending negative to the end of 2008, then they expect Q1 2009 to be a little better than Q1 2007 and Q1 2008, but only half that of Q1 2006. And they expect the 2nd half of 2008 to be about the same as the 2nd half of 2007. So that fwd PE is on very shaky ground right now given the uncertainty of timber and housing, and there aren't many projections that qualify as anything but vague at best. I guess I hold it because of what Jim Jubak said at the time... "they're not making any more land". PCL is poised with 8 million acres of prime land, some of it various timber grades and some of it just waiting to be sold off for development. Most cash flows comes from timber, and with housing down right now those streams are much lower. When housing picks up again (and it will), it may not be at the frenzy pace that it was but there will still be an ever-expanding population that will require land and timber. If you're looking to buy in, I'd wait to maybe get it at around $41. I think it's still very volatile and likely to drop to that at some point in the coming months. Look at its price history over the last year. The price spiked in the last week or two (with no real news) well above its normal range for the last several months,

2008 Jun 03 09:08 AM

[Urbane Gori...:]

I've had the best luck buying "low" in this market... I don't know much about PCL as I always viewed it as a relatively low paying dividend stock ..(Compared to FRO, PGH etc... ) with not as much swing to it...

Having said that, I'm guessing that much of its product is saleable overseas... I understand that Japan buys a lot of American wood product ... And I'd hazard a guess and say that China will be needing more lumber as well... Also, if I recall, their land value exceeds the company's book value... That's worth something.

However, having said that, why jump in here, when a quick look at teh chart indicates that it tends to drop (recently below $39... ). Why not wait for another round of horror stories from the homebuilders and another round of bank led S&P drops, then put in your GTC order at $39... Having lost money on the value of a stock while enjoying the dubious benefits of a dividend, I'd be tempted to have a little patience... The worse that happens is you buy on a later drop to a higher value...

Thx jegan ;-)

2008 Jun 03 06:44 PM

[Roger Nusbaum:]

thanks for all the comments. this post isn't about PCL and whether to buy it now or ever. It is about purpose stocks that tend to have a low correlation to SPX like what I perceive PCL to be. PCL is just an example.

2008 Jun 03 07:14 PM

[d_teller:]

Timber has been a great "uncorrelated" asset class for 50 year +, and the returns have been stellar - BUT a lot of the timber companies went into land sales (JOE, ALEX,) are examples, and their shares have now fallen almost to the point where it might make sense to accumulate on drops below their 5 yr support levels.

I also hold TWTUF - a stapled unit from Canada. They sell land when its price is better than the lumber...and they're subject to losses from pin-bark beetles, etc., but the royalty payments keep coming.

Other companies to look at are Aracruz Cellulose (ARA) and Vorantrim, in SA, and Deltic (factor out the nat gas leases first in attempting valuation).

2008 Jun 03 08:19 PM

[Roger Nusbaum:]

never heard of Timbewest, I'll check it out.

2008 Jun 03 11:10 PM

[Woodhead:]

What would be the effect of the "green economy" on the timber stocks in the future?

2008 Jun 04 07:55 AM

[Roger Nusbaum:]

selective harvesting is not a very new thing. if anything it might become more prevalent which could be a plus for the segment but of course I am probably biased.

2008 Jun 04 08:50 AM