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Potlatch Could Be The Pot Of Gold Inflation Hedge

Arturo Neto, CFA profile picture
Arturo Neto, CFA


  • Timber REITs are attractive inflation hedges, and Potlatch is one of our top picks.
  • Its manufacturing segment and indexed pricing contracts benefit from higher lumber prices.
  • At current valuations, the stock looks reasonably valued and analysts could soon up their price targets.

In January we published an article addressing the impact of inflation on Timber REITs and which ones, specifically, have benefited most historically from inflationary pressures. Our thesis was predicated on the ability for Timber REITs to leverage their manufacturing segments to boost their top line. Our analysis concluded that Weyerhaeuser (WY) had the largest portion of its business related to manufacturing and the quantitative analysis we completed confirmed that, at least historically, it's stock price was most sensitive to increases in prices - especially to lumber prices.

However, Potlatch Corporation (NASDAQ:PCH) also has a substantial portion of its business coming from its manufacturing segment. According to the PCH Investor presentation, it has a greater exposure to manufacturing than WY. (WY's presentation has it the other way around) In any case, Potlatch also showed a strong correlation to prices - which makes sense given its manufacturing segment.

Another driver that helps Potlatch benefit from rising prices, however, is that its Idaho production is indexed to inland lumber prices. And it's Idaho production is a substantial portion of its manufacturing output. Inflation hedge!

Recent Results

Recent results confirm strong momentum in pricing, production, and cash flow generation. 4Q results were not indicative of a very strong year, however the full year numbers were considerably higher than last year and additional price increases expected in early 2018 could help the momentum continue. For example, while the Resource segment had a decline in operating income of $12MM in the quarter, it was up $25MM on a YTD basis. The same conclusion could be drawn on net income, which was down from $0.94 per share to $0.62 per share for the quarter but up from $1.18 to $2.51 YTD. Margins also declined quarter to quarter but were up on a year over year basis and continue to be on an upward trend. The chart below shows the Resource business metrics.

This article was written by

Arturo Neto, CFA profile picture
I have been involved in financial services for almost 30 years. When I first started focusing on financial planning and money management it was out of a first-hand experience watching friends and family having to work well past retirement age because they hadn't saved or invested enough. Eventually I landed in a family office worth hundreds of millions of dollars where I was able to see 'how the other half lived' so to speak. I now operate a wealth advisory firm and publish articles on Seeking Alpha for DIY investors that prefer to manage their own money. As publisher of The Income Strategist, a premium subscription service on SA, my goal is to guide investors on how best to generate income from their investments. The service includes several income portfolios with different strategies that members can use independently or in combination. As part of the service, I also collaborate with other SA authors to provide broader and deeper coverage of investing. In addition to being a Chartered Financial Analyst, I am also a Certified Private Wealth Advisor and have an MBA from the Darden Graduate School of Business at the University of Virginia. I also hold a Master of Science in Finance and Bachelors in Finance from Florida International University. Having lived in Miami almost my entire life, my family and I relocated to Nashville, Tennessee in May 2018 in the pursuit of a better lifestyle and southern hospitality. If you're ever in the area, please do reach out. I'm happy to be teaming up with the following expert analyst contributors:1. Dilantha De Silva2. The Belgian Dentist

Analyst’s Disclosure: I am/we are long WY. 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.

Looking to buy PCH.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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