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.)