Plum Creek Is Buy-and-Hold Timber

I got a little antsy with Plum Creek Timber (PCL - commentary - Cramer's Take) last winter and sold out in February in the $43 range. That seemed pricey at the time, and I saw better opportunity elsewhere. Unfortunately, I missed another $13 of upside when the stock ran up to $56 in September (upside plus a couple of nice dividends). Since then, it's been nearly all downhill, and at its low point the stock hit $27 intraday two weeks ago, 52% off its 52-week high. Now, at $33, PCL is looking interesting.

It's no mystery why Plum Creek pulled back so dramatically over a two-month time frame: a combination of an equity market in free fall and Plum Creek's primary businesses, timber (47% of revenue) and manufacturing (lumber, 25% of revenue), being severely affected by the extremely difficult conditions in construction.

Third-quarter revenue rose 1.7% to $414 million, and net income was actually decent under the circumstances ($69 million and 40 cents a share in fully earnings vs. $59 million and 34 cents for the same quarter last year), above the 39-cent consensus. Still, the risks here are obvious. A prolonged freeze in new construction would no doubt lower demand for the commodity and exacerbate the decline in wood prices, which are down more than 30% in the past year. I'm perhaps a little more optimistic here than most, but nonetheless I view Plum Creek as a longer-term holding, part real estate asset play, part income generator.

Plum Creek is the largest private landholder in the U.S., with about 7.8 million acres in 18 states. For perspective, that's roughly 12,200 square miles, slightly smaller than Rhode Island, Delaware and New Jersey combined. About 1.7 million of those acres are of "higher and better use," which the company intends to divest itself of over the next 15 years for conservation, residential or recreational uses. At its current enterprise value of $8.49 billion, that puts PCL's land holdings at $1,088 on an enterprise-value-to-acre basis, a calculation I use for comparative purposes when analyzing companies with land holdings. Certainly, the "higher and better" use lands are more valuable than common timberland on a per-acre basis.

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At the time of publication, Heller had no positions in stocks mentioned.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, a fee-only financial planning he recently launched. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.