Pinocchio Does Not Play Soccer

Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At the potrero - slang for the neighborhood’s soccer field - those who can’t perform are said to have wooden legs. The slang is meant to look down on soccer players who lack dribbling skills.

In this analysis, however, everything related to wood is good. Since the timber industry is steadily recovering, Plum Creek Timber (NYSE: PCL), Rayonier (NYSE: RYN), and Weyerhaeuser (NYSE: WY) have seen its reports become increasingly positive. But, are they worth investing in?

The South is going to do it again

Holding the second position in the market to Weyerhaeuser, Rayonier shows a better operating margin thanks to its fiber division. Even with a smaller scale, the firm’s operating volume double’s that of its major market competitor. The timberland division, however, has experienced increased revenues and a reduction on operating margin. The real state division took a big step back with a decline on revenues of 20%.

In comparison with Weyerhaeuser’s heavier presence in the Pacific Coast, Rayonier’s footprint is located in the South. The region is seeing an above national average demographic rise which, coupled with a recovering housing market, will drive log farming demand. Also, the firm’s fiber division is expected to perform better than the competition due to diversification into non-commodity products. On the downside, Rayonier will be negatively impacted by the reducing demand for paper in the US market.

When looking at financial metrics, Rayonier has steadily increased revenue and debt since 2009, while cash flow has taken an important dive since 2010. Losses have nonetheless been ameliorated by a rising net income, giving the company the best operating income and return on equity in the industry.

In all, Rayonier is trading at 19.2 times its earnings, at a 10% discount to the 21.5 times industry average. With a 3.18% yield, and $0.44 dividends, the stock is very attractive when compared to competitors. So, it is recommended to buy for a long-term investment because rising demographic indicators guarantee steady growth for the next 5 years.

Plum creek timber

A recovering housing market has given a push to companies involved in that market. Plum Creek has shown to hold a strong correlation between company’s fundamentals, lumber price and stock price. Additionally, the firm is the most geographically diversified market competitor. So, as wood prices rise, future prospects for the firm are well founded.

Diversification is the strongest weapon on Plum’s arsenal because it reduces t impact form market swings. Catalysts like governmental energy regulation in the US and Europe will drive the demand for pulpwood and biomass, a 10-years agreement with Drax improves long-term stability, and mountain pine beetle plague and US housing market recovery will drive wood prices up.

Looking at Plum’s finances, the image is not so clear. The company retains a high operating margin and return on equity. Revenue has also been on the rise and debt declining. However, free cash flow has taken an important dive.

Currently widely overvalued, Plum is recommended to hold until debt is put under control, because its yield remains below other market competitors and dividends are at the same level.

Take me to the wild side

For how long will Weyerhaeuser remain on the real state market? Contemplating a sale of its homebuilding division, announcing a new CEO from the timber business, and the recent purchase of 645,000 acres with high quality Douglas-fir indicate the firm is turning into a pure timber REIT business model.

With positive first quarter reports for 2013 - revenues up 33% - Weyerhaeuser has continued to reward shareholders. Looking into the future, and pushed by a steady recovery of the housing market, the firm holds great prospects. Management continues to search for better efficiency ratios and a reduction of manufacturing costs. Attention has focused on less energy consumption and removal of incompetent facilities.

Weyerhaeuser also possesses fitting timber for the domestic and international market. Additionally, the firm holds timber for wood products expected to continue growing sale volumes aided by the housing market recovery. In consequence, the ‘fluff-pulp’ division will no longer be the leading division for the business model.

Financially, Weyerhaeuser’s standing has relatively improved, though. Revenue and net income have been on the rise, together with free cash. However, overall cash flow has been on the downside, not being able to close the gap with decreasing debt levels. Currently, at 31 times its earnings, a 46% premium to the 21.2 times industry average, the stock is widely overpriced. It is recommended to hold until price adjusts after internal restructuring.

Botton line

Demographic changes usually fuel long term changes. Events in the Southern US will only accentuate with time, driving demand for housing up. For this particular reason, this analyst prefers Rayonier for a long-term investment.

Damian Illia has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus