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Plum Creek Timber (NYSE: PCL), one of the largest private timberland owners in the U.S., is down some 10.5% over the past month, which is well above the 2.5% pullback in the S&P 500. Now appears to be a great time to buy this market-leading timber REIT.
Plum Creek is one of the largest private owners of timberland in the U.S., owning some 6.6 million acres of timberland in 19 states and offering investors an impressive 3.9% dividend yield.
The real tailwinds for the stock should be a rebounding housing market. S&P expects housing starts to surpass 1 million in 2013 and then reach 1.3 million units in 2014. The timber grown and processed by the major timber REITs is a fundamental input in home building.
What makes Plum Creek a great pick is that unlike its peers (mentioned later), the REIT has a heavy weighting toward wood products and real estate. Its timber operations account for nearly 50% of revenue, with real estate operations at 25%.
Plum Creek has been under-performing its major peers over the past five years.
I believe this has been due in large part to Plum Creek's enviable exposure to the real estate industry, which, until now, has been a negative for the company. As a result, I think Plum Creek is the best industry-pick going forward.
Plum Creek also has impressive value in its land holdings. The REIT plans to develop over 70,000 acres of land over the next decade and a half. This should come as timber prices rise thanks to the increasing demand in the housing markets.
Other notable timber REITs include Rayonier (NYSE: RYN) and Weyerhaeuser (NYSE: WY). Rayonier produces and markets timber, specialty fibers and wood products. This REIT owns, leases or manages 2.7 million acres of timberland in the U.S., New Zealand and Australia.
Although Rayonier is a timber REIT, it appears to have less exposure to the overall housing boom. The REIT gets 70% of revenue from fibers, which makes products used in acetate textile fibers, photographic film, impact-resistant packaging, cigarette filters and food products.
Earlier this year, Rayonier sold off its woods-products segment to International Forest Products, which goes hand-in-hand with the REIT's strategy of shifting its manufacturing operations to specialty chemicals. Although Rayonier is still considered a timber REIT, I think its over reliance on the fibers segment makes it an unattractive play on housing. Rayonier also pays the lowest dividend yield of the major timber REITs at 3.3%.
Weyerhaeuser's wood-products segment is the revenue workhorse, generating over 40% of revenue, while the cellulose-fibers segment generates only 26% of revenue. Timberland (15% of revenue) and real estate (15%) round out the remaining parts of Weyerhaeuser's revenue.
Big news of late for Weyerhaeuser includes its big purchase of Longview Timber for $2.6 billion. This is one of the largest North America forestry acquisitions in recent history. The deal will add 645,000 acres of timberland in Washington state and Oregon to Weyerhaeuser's portfolio and is expected to be immediately accretive to funds for distribution.
The Weyerhaueser-Longview deal is the third-largest acquisition over the past 15 years behind only Resource Management Service's $5 billion purchase of International Paper's assets in 2006, and Plum Creek's $3.3 billion acquisition of Georgia-Pacific in 2001.
With the purchase, Weyerhaeuser noted it is now considering the spin-off of its home-building and real estate development business to focus more on developing wood products.
Going into the second quarter, there were a total of 13 hedge funds long Rayonier, an 8% increase from the previous quarter. The top hedge fund owner had a $227 million position and it was Jean-Marie Eveillard's First Eagle Investment Management (check out First Eagle's high yielders).
First Eagle also has an affinity for both Weyerhaeuser and Plum Creek, having the top position among hedge funds in both. For Plum Creek, there were a total of 12 hedge funds long the stock. Behind First Eagle's top position was Markel Gayner Asset Management in second with an $18.3 million position (check out Markel's newest stock picks).
For Weyerhaeuser, there were a total of 33 hedge funds long the stock, with Third Avenue Management having the second-largest position worth $194 million and accounting for 3.7% of its 13F portfolio (see Third Avenue's top picks).
I've had an appreciation for timber REITs over the past few months, with my top pick being Rayonier given the company's high margins; however, with the recent pullback in Plum Creek, it's time to reconsider.
Rayonier's exposure to the high-margin, high-barriers-to-entry fibers business is impressive, but I like Plum Creek due to its exposure to the housing industry via its greater reliance on timber and real estate, even compared to Weyerhaeuser. And Plum Creek offers investors an impressive 18% return on equity, compared to Weyerhaeuser's 11.5%.
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Marshall Hargrave 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!