The future
These companies look solid enough and have simple business models that even I can understand. Even better, I believe there are significant long-term trends that bode well for Plum Creek Timber Co. Inc. (NYSE:PCL)’s and Potlatch’s futures.
Residential construction is the major force that drives demand in this industry, and while new home starts have been increasing consistently over the last year they still have a very long way to go. The Census Bureau’s report on housing starts in May showed an annual rate of nearly 1 Million homes. This is great considering in May of 2012 it was around 600,000. However, the historical annual average of new home starts is around 1.5 Million. This indicates to me that demand for wood is going to increase.
Prices are already beginning to reflect this trend. According to Timber Mart-South, southern sawlog prices are increasing after bottoming out around $24 per ton after dropping from nearly $40 a ton in 2007. A second driver of future demand is the effect of a pine beetle in British Columbia that has destroyed over 50% of the pine trees in that region. British Columbia has produced around 25% of the lumber used in the United States, and it’s estimated it will take up to 60 years for these forests to fully recover.
The drastic reduction in supply from Canada will increase prices and generate more business for Plum Creek Timber Co. Inc. (NYSE:PCL) and Potlatch Corporation (NASDAQ:PCH). This should also open up new timber export opportunities to China. In 2012 British Columbia exported over 3 Billion board feet (bbf) to China compared to only 0.5 bbf from the United States. Plum Creek estimates that the demand opportunity in the United States and China as a result of the pine beetle in Canada could be the equivalent of 600,000 housing starts.
A final driver of growth is biomass energy demand in the European Union. Biomass energy is a broad term that includes burning wood pellets, and since it’s defined as a renewable energy source it has become a popular option for countries that have committed themselves to renewable energy. Instead of making significant investments in windmills or solar energy, relatively cheap modifications can be made to coal plants to burn biomass or even a mixture of coal and biomass. Reuters UK reported in January that European biomass demand was expected to triple by 2020 and that Europe would need to import 66% of its biomass from abroad. That sounds like a slam dunk for Plum Creek Timber Co. Inc. (NYSE:PCL) and Potlatch Corporation (NASDAQ:PCH).
Dogs no more
These companies look like great opportunities to pick up, especially on days when the market collectively shudders anytime someone mentions interest rates. All of that noise has nothing to do with their businesses and the opportunities that lay ahead. It’s times like these when well run companies go on sale for those investors who focus on the fundamentals of the business and assess the growth prospects ahead. These two fit the bill perfectly.
The article REIT’s: Once the Darlings, Now the Dogs? originally appeared on Fool.com and is written by Stephen Benz.
Stephen Benz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Stephen is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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