Nothing Exciting to Report from Plum Creek

By Matthew DiLallo - August 3, 2012 | Tickers: BAM, PCL, PCH, RYN, WY | 0 Comments

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You have to admit; there truly are few things more boring than an investment in timber. Plant a tree, wait, wait some more, send the kids off to college, wait again, harvest the tree and then repeat the cycle. While it’s not exactly that simple, it is hard to find much to be excited about.

So when Plum Creek (NYSE: PCL) reported earnings the other day, I had to dig deep to find something worth being excited about. Trouble is, I really didn't find anything. The report was ok, their second quarter results of $0.22 a share were slightly above their guidance range, though they are down from the $0.27 a share from the year-ago quarter. The management team ran through a bunch of statistics for each operating segment, some were higher, some were lower. Overall they are seeing a slow improvement in their business while their operations are performing well. As the biggest pure play timber REIT they are still waiting for lumber prices to really take a turn in order to see cash flow improve. There’s really not much to say about the report that won’t make your eyes heavy.

Therein lies the beauty of the investment, it is one of those investments that lets you sleep easier at night. As long as management doesn't over lever the company in an attempt produce some exciting growth, you can pretty much just sit back and collect the dividend checks as the trees do most of the work. As far as management teams go there are few better in my opinion than the team at Plum Creek. They know their business inside and out so that you can sit back and relax.  Don’t believe me?  Check out what CEO Rick Holley had to say on the conference call, “We continue to be excited about the future prospects for Plum Creek. Our unmatched geographic diversity, conservative balance sheet and excellent liquidity serve us well as we continue to execute on strategies designed to maximize value and investment in the company.”

Even though their current quarter wasn’t too exciting and the outlook for the next year is mixed, longer term the company should provide nice returns for shareholders.  The big hang up in growing the company, other than literally because the trees take care of that themselves, is housing. However, even as housing continues to lag, investors in timber REITs have seen a decent return so far this year. The two more pure plays in the industry, Potlatch (NASDAQ: PCH) and Plum Creek are up 11% while the market as measured by the S&P 500 is up 9.7%. What’s interesting is that the more housing sensitive Weyerhaeuser (NYSE: WY) is up 25% while cellulose fiber standout Rayonier (NYSE: RYN) is the lone laggard at just a 7% return.

While Rayonier investors might be lagging the market this year, they did just see their dividend boosted by 10% last month. While it is easy to make a compelling case for either Weyerhaeuser or Rayonier to play the housing turnaround or even that they are a better investment than Plum Creek, what I find more compelling is my faith in the management team at Plum Creek.

Looking Ahead:

While we do wait for housing to turn, and cash flow to grow, investors in Plum Creek can bank on the solid management team looking out for their best interests. While the company is forecasting earnings of $0.32 to $0.37 for the third quarter and their guidance is unchanged for the full year, however, they are seeing a cooling of the Chinese export market. To combat this they are actively pursuing a variety of export opportunities in the developing markets, including both Turkey and India.

The company continues to manage their portfolio of timberlands to create long term value as CEO Rick Holley said on the conference call, “We continue to valuate timberlands for both purchase and sale and will be purchasing when we find opportunities that create value for shareholders.” Couple this with what he said in the earnings press release, "We continue to manage the company to maximize the long-term value of our shareholders' investment. To accomplish this, nothing is more important than continued disciplined capital allocation. We will continue to evaluate all our opportunities to maximize shareholder value through share repurchase, debt reduction, or timberland acquisition; whatever creates the most value for our shareholders," and you have a company that is focused on value.

I always find it interesting to note that management teams that are focused on value actually do sell when the price is right.  One of the interesting items of note from the Q&A session on the conference call was when an analyst brought up that he'd heard that Brookfield (NYSE: BAM) was looking to sell timberlands. Rick Holley's response is a good one for investors to take note of as he said, "I haven't heard about Brookfield, but my guess is that's what they might do is take some off the table and redeploy the capital in an area where they can even get a higher return. So I think it's just good business, good capital allocation."  I like to see management teams that are focused on creating value and on returns.  In a slow growth business like timber, it can mean all the difference.

Bottom Line:

I’m not looking for stellar growth from Plum Creek; an investment in the company is an investment that the management team can continue to manage through the current cycle in a position to grow their income and therefore their dividend. An investment in Plum Creek is a marathon and not a sprint; it is about long term income generation. Followers of the “No Drip, No Mess” virtual portfolio know that “we’ll use Plum Creek as a core income position where we’ll supplement the dividend with recurring option income whenever possible.” We began by writing a November $35 put to add the shares to the portfolio; at present those puts look to expire worthless. If that ends up being the case and shares are still a fair value we’ll look at another round of put writes, wait, wait some more, watch them die worthless and then try again.

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