Results for Plum Creek Timber (PCL) have been grim lately. But, unfortunately, I don’t think we’ve heard the last of the bad news. In fact the second half of 2009 could bring significant disappointments. So I’m going to take my punishment now and sell these shares with a 30% loss, counting dividends, since I added them to The Jubak’s Picks on November 16, 2007. Here’s the problem. Plum Creek, like every other timber company, is cutting its harvest because it simply can’t sell much lumber into the weak housing market. In the first quarter of 2009 the company reduced harvest of saw logs from its Northern Resources segment by 46% and from its Southern Resources segment by 37% from the levels of the first quarter of 2008. Over all the company cut 550,000 tons from its harvest plan for saw logs from its forecast for 2009. The great thing about timber is that, within reason, trees that aren’t cut one year can be cut the next so Plum Creek isn’t so much writing off value as postponing it. But with every other timber company doing the same thing that industry-wide postponement is building up a big overhang of supply that will hit prices like a ton of bricks as soon as these companies see any signs of returning demand. Saw log prices were already down 15% in the first quarter of the year from the first quarter of 2008 and with this supply overhang I have trouble seeing a second half recovery in prices even if the freefall in home building ends.
Just as damaging for the short-term, the company is forecasting the typical second half surge in land sales. Land prices have been holding up better than I would have executives predicted much better performance from this division in the second half of 2009. That sets the stock up for disappointment if, as it now seems, the economy isn’t quite as strong asexpected—the company sold 1500 acres of development land in the first quarter for $4,100 an acre. (Long-term investors take note. The current stock price values the company’s land at more like $1000 an acre.) But sales volume has been extremely low. That wouldn’t be a problem except that in its last guidance to Wall Street, company investors believed during the spring rally. I think any lasting appreciation in this stock is a matter of late 2010 or 2011. Put it in your watch list until next year. The company is set to announce second quarter results on July 27, 2009. (Full disclosure: I will sell my personal shares of Plum Creek Timber three days after this column is posted.)
Hi Jim:
Just ‘rediscovered’ you and your new site, and trying to play catch-up from when you left MSN this spring.
I am behind in four buys (MSFT, POT, JOYG, & QCOM) and what looks like 3 sells (PCL, USB Capital and PBR). The sells are what are confusing me – on the site it shows no sells for Jubaks Picks Portfolios, and the three sells for the 50 Portfolio.
Is that correct, or are the sells actually from the 12-18 month Portfolio?
My brokerage account was changed from a 401 to an IRA in April but I lost all basket/portfolio info when the switch was made, so that has added to my confusion.
Thanks for any help – welcome back; you were missed!
Rich
Before I bought any natural gas shares I’d make sure I knew what percentage of production is hedged. Ultrapetroleum (UPL), for example, has substanial hedges in place arouind $5. That gives the company great downside protection from current prices well below $5, but also limits the upside from a winter spike. If you want to play the seasonal game, look for a company with low producton costs but that is relatively unhedged.
The other issue with PCL is where recent land sales have come from. A lot seem to have been conservation sales in Montana. As I understand these sales, they aren’t a reflection of demand for real estate for home building but of the desire of varous public and private entitiies to buy up some land for conservation purposes.
PCL spoke at the 2009 NAREIT conference. They told a great tale. However, during the Q&A, management was asked a question regarding dividend sustainability if the housing market stays weak. The answer was basically “then all bets are off”. I think that says enough as all bubbles overcorrect (except timber because it keeps growing). We have a long time yet before housing rebounds.
I’m looking for a $15 price and sustainable cash flow.
Jeremy
[Commodities]
Jim, there has been a lot of talk about natural gas prices, particularly in the context of UNG. Natural gas seems to be at an all time low now, with some down trend potential. Do you think we will see a price spike during winter when the seasonal demand for NG increases?