Analysis Of Potlatch Corporation 3rd Quarter Results

| About: Potlatch Corporation (PCH)

Potlatch Corporation (NASDAQ:PCH) announced 3rd quarter results Monday morning. I could bore you all by going through the rather mundane numbers, comparing 3rd quarter 2012 to 2nd quarter 2012, and 3rd quarter 2011, but I'd put most of you, and myself, to sleep doing so. Suffice it to say that third quarter 2012 was better than the 2nd quarter and not as good as last year's 3rd quarter. There are many reasons. By design, harvest volume in 2012 is about 22% less than 2011. A large non-strategic timberland sale occurred in 2011 and not 2012. Third quarter is usually the strongest due to seasonality.

The main takeaway, and a very significant one for timberland investors, is that Wood Products, that is lumber and plywood, are going through the roof. Operating income from the Wood Products segment of Potlatch was up 30% over 2nd quarter 2012, up 426% over third quarter 2011, and up 273% year over year. This is significant for Potlatch, as it helps prop up the Timber and Real Estate segments, but it mainly highlights and supports the fact that housing is on the rebound. As we all know, the collapse in housing over the last four to five years has been the main reason timber companies have been struggling and treading water at best.

Lumber prices are up 21% since 3rd quarter 2011 and up 13% year over year. Potlatch saw this coming and has been upping production at their mills, 9% year over year so far. They have done this mainly through increased hours of operation at their mills, and minor capital improvements that help efficiency. They have not added any new shifts so far, although they could up production considerably in that way. It should be noted that about 15% of North American lumber capacity has been permanently lost over the past five years. This should help prop up lumber prices over the near term. In addition, Canadian lumber production and shipments to the US will be down for some time due to the Mountain Pine Beetle epidemic and increased Canadian lumber shipments to China.

The trickle down of lumber prices to log prices has not occurred as of yet. This is normal. Log prices usually lag lumber prices by at least three to six months. When this does occur, probably next year, Potlatch and the other Timber REITs, Plum Creek Timber Company (NYSE:PCL), Weyerhauser (NYSE:WY), and Raynoier (NYSE:RYN), will see a considerable rebound in earnings and cash flow. Timber REIT operations are pretty lean and mean right now due the extended downturn they have been through. A lot of the log price increase will pass right to the bottom line. In addition, Potlatch, and many others, have been deferring harvest volume waiting for better pricing. When prices improve, the additional volume will follow. An added benefit to the Timber REIT structure is that most of the added earnings from log price increases will be in the REIT segment of the business and not taxed at the corporate level.

Potlatch's stock price is now at $38.80, up 23% from $31.46 on January 1, 2012, and yield is about 3.2%. It is not exactly a bargain right now, but for those who have been long Timber REITs, the good times are just ahead.

Disclosure: I am long PCH, PCL, RYN. 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.