3 Timber Stocks To Watch
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Among all the sectors which are showing the signs of recovery in the US economy, the Housing market is the one which is making a strong comeback. According to the most recent Fiserv Case-Shiller data, the real-estate market this year was the most stable since the housing bubble-burst in 2006. As per this data, the prices of houses are rising again and have already increased by ~1.2% since last year. Home sales are improving as the demand for houses is returning back and consequently construction activity is also picking up again. I feel that one of the reasons responsible for this improvement in the housing climate is the low prime interest rate which drives down the cost of mortgages. As a result, consumers are again advancing towards buying homes and properties. The various companies in the US which are engaged in real-estate and construction business have a significant leverage to a US housing recovery. Moreover, the reconstruction efforts after the Hurricane Sandy will also boost up the construction activities in the near future.
The recent improvement in housing activities in the US will definitely benefit timber producers, as the largest end-market for timber products is the construction business. According to the 'The North America Solid Wood Products Outlook: 2011-2015' released by International Wood Markets Group, timber prices are expected to double in the next four years. Today, I have picked up three stocks for my analysis which are big names in timber production and also operate in the real estate business. Let's have a look at their stock price movements which have shown good upside movement.
Plum Creek Timber earns the majority of its revenue (48% of the total) through the sale of timber and other manufactured timber products. Besides this, the company also has a REIT (Real Estate Investment Trust) status because of its large land holdings and it gains a huge amount by selling its land areas. Its vast and geographically diversified land holdings give it an edge among its peers, as natural disasters in one region don't affect the overall revenue of the company. Another feather in the company's cap is its shareholder focused management that has kept the dividends stable despite falling timber prices during the housing crisis. Plum Creek was able to manage its costs and cut down ~$100 million in its annual expenses which directly boosted its bottom line. And, now with the rising housing activities the company is all set to make great investor friendly decisions. The stock currently has an attractive yield of ~4% for its shareholders.
Another REIT which also manages timberland is Rayonier who has a decent dividend yield of ~3.5%. The company holds good share of timberland in the Washington state which has higher exposure to the Asian log export market. To leverage that opportunity, Rayonier has increased its harvest levels in Washington. Along with this, the company is eyeing China for its future growth opportunities. China imports half of its log demand and the majority of that is supplied through Russia. However, the rising cost of Russian logs due to higher export duties and higher transportation costs could benefit the American timber companies. These structural changes in the global timber market would help Rayonier to enhance its market share with higher profits.
Weyerhaeuser with its large timber holdings of ~$6 million acres spread mainly in the Pacific Northwest and Southern US has a huge opportunity in rising prices. The company's timberlands are known as the best-managed and highly productive lands. The company recently announced its investment of ~$6 million in Louisiana at their Natchitoches forest products plant. The investment would enhance and modernize its equipment for better productivity at the site. This would also result in additional jobs along with higher efficiency and process improvements. Apart from the US, Weyerhaeuser is growing its business globally and earns majority of its export revenue from Japan. With the beginning of reconstruction activity after the catastrophic destruction in Japan, the company is set to boost up its earnings with its strong presence in the region.
To conclude, I feel that with the improvement in the US housing sector and rising timber prices, the timber producers are ready for a long-term strong performance. If asked to choose one, I would like to commend Weyerhaeuser looking at its diversified operations and higher exposure to timberlands. The stock is currently trading at ~$27.25 and more upside movements are expected fueled by the domestic housing recovery.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Weyerhaeuser Company. 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!