Plum Creek Timber Co. Inc. (PCL), Rayonier Inc. (RYN), Weyerhaeuser Company (WY): Pinocchio Does Not Play Soccer

At the potrero – slang for the neighborhood’s soccer field – those who can’t perform are said to have wooden legs. The slang is meant to look down on soccer players who lack dribbling skills.

In this analysis, however, everything related to wood is good. Since the timber industry is steadily recovering, Plum Creek Timber Co. Inc. (NYSE:PCL), Rayonier Inc. (NYSE:RYN), and Weyerhaeuser Company (NYSE:WY) have seen its reports become increasingly positive. But, are they worth investing in?

The South is going to do it again

Holding the second position in the market to Weyerhaeuser Company (NYSE:WY), Rayonier Inc. (NYSE:RYN) shows a better operating margin thanks to its fiber division. Even with a smaller scale, the firm’s operating volume double’s that of its major market competitor. The timberland division, however, has experienced increased revenues and a reduction on operating margin. The real state division took a big step back with a decline on revenues of 20%.

In comparison with Weyerhaeuser Company (NYSE:WY)’s heavier presence in the Pacific Coast, Rayonier Inc. (NYSE:RYN)’s footprint is located in the South. The region is seeing an above national average demographic rise which, coupled with a recovering housing market, will drive log farming demand. Also, the firm’s fiber division is expected to perform better than the competition due to diversification into non-commodity products. On the downside, Rayonier will be negatively impacted by the reducing demand for paper in the US market.

When looking at financial metrics, Rayonier Inc. (NYSE:RYN) has steadily increased revenue and debt since 2009, while cash flow has taken an important dive since 2010. Losses have nonetheless been ameliorated by a rising net income, giving the company the best operating income and return on equity in the industry.

In all, Rayonier Inc. (NYSE:RYN) is trading at 19.2 times its earnings, at a 10% discount to the 21.5 times industry average. With a 3.18% yield, and $0.44 dividends, the stock is very attractive when compared to competitors. So, it is recommended to buy for a long-term investment because rising demographic indicators guarantee steady growth for the next 5 years.

Plum Creek Timber Co. Inc. (NYSE:PCL)

A recovering housing market has given a push to companies involved in that market. Plum Creek Timber Co. Inc. (NYSE:PCL) has shown to hold a strong correlation between company’s fundamentals, lumber price and stock price. Additionally, the firm is the most geographically diversified market competitor. So, as wood prices rise, future prospects for the firm are well founded.

Diversification is the strongest weapon on Plum’s arsenal because it reduces t impact form market swings. Catalysts like governmental energy regulation in the US and Europe will drive the demand for pulpwood and biomass, a 10-years agreement with Drax improves long-term stability, and mountain pine beetle plague and US housing market recovery will drive wood prices up.

Looking at Plum’s finances, the image is not so clear. The company retains a high operating margin and return on equity. Revenue has also been on the rise and debt declining. However, free cash flow has taken an important dive.

Currently widely overvalued, Plum is recommended to hold until debt is put under control, because its yield remains below other market competitors and dividends are at the same level.