Shiver Me Timbers! "Log" These Companies in Your Portfolio
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Today, as an investor, do you have the proverbial intestinal fortitude to invest in an industry sector that depends on the housing and even still the publishing industry to some extent? It's not to say that Plum Creek Timber (NYSE: PCL) and those of its ilk can't get along with advancing their businesses somewhat when there's trouble in these sectors. However, it's infinitely more difficult and downturns and reconfigurations in those sectors do affect the Company greatly. The economic turmoil of 2008 and the resultant housing collapse made it feel as if the rafters were falling in on timber companies.
Plum Creek Timber is a Real Estate Investment Trust (REIT). Primarily, they grow, harvest and sell timber. They sell logs to customers across the U.S. Who are their customers? They include wood product manufacturers as well as pulp and paper product manufacturers. In fact, the Company has their own wood products manufacturing facilities in the Northwest. They produce lumber, plywood and medium density fiberboard (MDF). Plum Creek sells these products to industrial, retail, and other specialty markets.
Plum Creek Timber is one of the largest landowners in the U.S. They have approximately 6.4 million acres in major timber producing regions of the nation. Plum Creek plants approximately 60 million seedlings each year. The company is organized as a REIT in managing their timberlands. Plum Creek additionally conducts diverse business activities via their taxable REIT subsidiaries (TRS).
Pertaining to manufactured products, they sell standing timber or stumpage, logs, lumber, plywood, the aforementioned MDF, and seedlings to customers in the U.S. and internationally. Pertaining to natural resources, the company concentrates on realizing the potential value of their vast property holdings. Their focus goes to the root level and deeper - they continue to discover and evaluate a spectrum of non-timber natural resources that exist on or below their land. These resources include aggregates, minerals, natural gas, oil, and stone.
So, what could have an investor shivering? Is investing in Plum Creek Timber a plum assignment – or just plum crazy? It depends on a few factors - and how they could affect the company.
According to reporter Brent Jang (The Globe & Mail newspaper - January 22, 2013 article) industry experts in general see a growth period for producers – with lumber highs sustainable for longer and the lows not quite as bad as recent past experiences. He states three factors that have contributed to the price appreciation of the lumber commodity – rebounding United States housing starts, robust exports to the People's Republic of China, and restricted timber supplies.
Sounds fine for now; still, one wonders if the market for lumber and other wood products could drop pretty fast if the housing industry falters again and household debt in North America contributes even more ferociously to the debacle.
Moreover, it's not only housing. Concerning pulp and paper, people are reading less newspapers and actual physical books – all because of easily accessible and inexpensive digital books, newspapers, and magazines. In addition, as is oft reported, more people get their news from traditional TV news programs, specialty channels, and the Internet.
U.S News and World Report stopped its print edition some time ago. Newsweek announced in October 2012 that they decided to abandon publishing a print edition after 80 years. The publishing industry has experienced as much turmoil as the foundational lumber industry that supports it. An investor has to consider these factors when investing in timber companies, along with the three positive factors that have caused a boom in the industry lately.
A significant strength of Plum Creek Timber is their extensive land holdings. In addition, the Company is being proactive in going after growth. This month, they announced that they acquired (for $75 million) an interest in approximately 144 million tons of production at four quarries from Vulcan Materials (NYSE: VMC). The quarries are near the Greenville and Spartanburg, South Carolina markets. The company expects to begin receiving royalty payments beginning this month from the production and sale of the crushed stone from the quarries; they expect this to continue for approximately 25 years.
To investors, it should speak of Plum Creek's desire to augment their primary business model for greater growth. The Company is adding to their construction materials royalty streams. Additional and different streams of revenue for a company deep-rooted in timber are – on paper – and hopefully in actuality, going to be a good thing for Plum Creek and their investors.
In late October 2012, Plum Creek Timber announced third quarter earnings of $59 million, or $0.36 per diluted share, on revenues of $354 million. They had earnings for the third quarter of 2011 of $50 million, or $0.31 per diluted share, on revenues of $293 million. The rebound in the industry was evident in this quarter and if the industry experts are right it could be a time for investors to look at timber companies in general. Revenue growth was especially significant and now with the Company adding revenue streams the potential for even greater revenues exists.
Earnings for Plum Creek for the first nine months of 2012 were $124 million, or $0.76 per diluted share, on revenues of $985 million. Earnings for the first nine months of 2011 were $132 million, or $0.81 per diluted share, on revenues of $852 million. The overall revenue growth was consistently strong for the nine-month period. However, the hit to earnings is something investors' should take note of.
Evident is the loss in operating income from the company's Northern Resources segment. This segment reported operating income of $5 million for the third quarter, down $2 million from the third quarter of 2011. That's substantial and not to be ignored by a potential investor who should look at all segment numbers when performing due diligence on any company.
The lower operating income in this segment was mainly due to a $2 decline in average sawlog prices because of the decline in export log prices experienced over the past year. Average pulpwood prices were $42 per ton. These were unchanged in comparison to the third quarter of 2011.
Operating income in their Southern Resources segment was $23 million. This represents an increase of $2 million from the $21 million reported during the third quarter of 2011. The Real Estate segment reported third quarter total revenue of $96 million and operating income of $54 million. Third quarter 2011 Real Estate segment revenue was $67 million and operating income was $46 million.
The Manufacturing segment reported $9 million of operating income for the third quarter. This is in comparison to the $3 million of operating income reported for the third quarter of 2011. Profit growth came from improving demand and prices for Plum Creek's plywood and MDF products. Therefore, the Company has strength in their other segments as a buffer for investors who desire not to see their profits end up in a wood chipper.
Plum Creeks' 2011 financial highlights included revenue of $1.17 billion, net income of $193 million, and net income/share of $1.19. So, from monetary seeds planted in the Company's stock, a strong business model overall exists that can supply ROI to investors.
Another REIT, Rayonier (NYSE: RYN), engages in the sale and development of real estate and timberland management. The company also engages in the production and sale of cellulose fibers in the U.S, Australia, and New Zealand. They operate in four segments, namely Timber, Real Estate, Performance Fibers, and Wood Products.
The Company just reported their fourth quarter and full year 2012 results. Significant to investors is Rayonier's net income growth in the quarter and for the full year. They reported fourth quarter net income of $76 million, or 59 cents per share. This is in comparison to $56 million, or 45 cents per share, in the same 2011 period. Full year 2012 results showed net income of $279 million, up from $276 million a year prior.
Company Chairman, President and CEO, Mr. Paul Boynton stated, "Our 2012 results, including a 13 percent increase over last year's pro forma operating income, reflect the balance and resiliency of our core businesses and our continued focus on operational excellence."
A trip into the forest by timber company investors includes stopping by the wayside and examining the essence of a company: their efficiency of operations, and their land holdings. Rayonier is focusing on efficient operations, which contributes to better margins. They are not straying from their strengths either - their core businesses of Forest Resources, Real Estate, and Performance Fibers. Moreover, they are one of the largest private landowners in the U.S. - certainly leveraging these assets for growth.
Something else for investors to check out are those timber companies that do business with entities related to their businesses. Consider timber companies seeking to produce revenue streams from closely related businesses. The above-mentioned business deal between Plum Creek Timber and Vulcan Materials Company fits this paradigm. Vulcan provides essential infrastructure materials. This Company is the country's leading producer of construction aggregates. These consist primarily of crushed stone, sand and gravel.
For the third quarter ended September 30, 2012, the Aggregates segment gross profit improved $11 million, or 10 percent. This reflected increased pricing and lower unit cost of sales. The lower unit cost of sales was because of improved productivity and cost reduction initiatives. Plum Creek has that aforementioned interest in tons of production at four quarries from Vulcan. Therefore, investors might want to consider company associations, wherein both companies are aggressive for growth, cost-efficient, striving to increase worker productivity and able to supply the infrastructure products that America needs on a consistent basis.
MichaelONTARIO 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!