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
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.
Take me to the wild side
For how long will Weyerhaeuser Company (NYSE:WY) remain on the real state market? Contemplating a sale of its homebuilding division, announcing a new CEO from the timber business, and the recent purchase of 645,000 acres with high quality Douglas-fir indicate the firm is turning into a pure timber REIT business model.
With positive first quarter reports for 2013 – revenues up 33% – Weyerhaeuser Company (NYSE:WY) has continued to reward shareholders. Looking into the future, and pushed by a steady recovery of the housing market, the firm holds great prospects. Management continues to search for better efficiency ratios and a reduction of manufacturing costs. Attention has focused on less energy consumption and removal of incompetent facilities.
Weyerhaeuser also possesses fitting timber for the domestic and international market. Additionally, the firm holds timber for wood products expected to continue growing sale volumes aided by the housing market recovery. In consequence, the ‘fluff-pulp’ division will no longer be the leading division for the business model.
Financially, Weyerhaeuser’s standing has relatively improved, though. Revenue and net income have been on the rise, together with free cash. However, overall cash flow has been on the downside, not being able to close the gap with decreasing debt levels. Currently, at 31 times its earnings, a 46% premium to the 21.2 times industry average, the stock is widely overpriced. It is recommended to hold until price adjusts after internal restructuring.
Botton line
Demographic changes usually fuel long term changes. Events in the Southern US will only accentuate with time, driving demand for housing up. For this particular reason, this analyst prefers Rayonier for a long-term investment.
Damian Illia has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Pinocchio Does Not Play Soccer originally appeared on Fool.com and is written by Damian Illia.
Damian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
