Note: FLASH REPORT; more details to come, changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update; 4Q15 & 2015 Earnings
Prev. Ed.: 3Q Earnings Update, Dec 17, 2015
Flash Update (earnings update to follow)
On Feb 3, 2016, Plum Creek announced its 4Q15 and full year 2015 earnings results. It reported 4Q15 earnings per share of $0.19, which included transaction costs of $0.04 per share related to the pending merger with another timberland harvesting company. Excluding the transaction costs, adjusted earnings per share for the company came in at $0.23, which beat the Zacks Consensus Estimate of $0.16. Adjusted earnings per share for 4Q14 were $0.38.
Total revenue for 4Q15 was $323 million, down 24.5% year over year.
For full-year 2015, earnings per share were $1.12, including merger-related expenses of $0.04 per share. For full-year 2014, earnings per share were recorded at $1.21, which included after-tax gains of $0.02 per share related to MDF fire. Total revenues for 2015 came in at $1.45 billion, down from $1.47 billion in 2014.
Merger with a Timber Giant
In Nov 2015, Plum Creek and another timberland company had inked a deal to create a leading global timber, land and forest products company. The merger deal awaits approvals from shareholders of both the companies. The voting of the shareholders is scheduled on Feb 12, 2016.
Segmental Performance
During 4Q15, operating income at the company’s Northern Resources segment declined to $5 million from $10 million recorded in 4Q14, mainly due to lower harvest volumes and lower sawlog prices.
The Southern Resources segment posted operating income of $27 million, down from $38 million in 4Q4. The Southern harvest volumes declined 12%, while the average Southern sawlog prices fell around $1.50 per ton, both on a year-over-year basis.
Operating income at the Real Estate segment was $30 million for 4Q15, lower than $42 million reported a year ago. Results reflected the sale of 16,950 acres of HBU/Recreation lands for over $1,900 per acre; 12,420 acres of small, non-strategic timberlands for $1,390 per acre and 4,600 acres of conservation lands, for $800 per acre.
Operating income at the Manufacturing segment came in at $4 million, down from $14 million in 4Q14. Notably, 4Q14 results include $4 million of pre-tax gains from insurance recoveries associated with MDF fire.
Operating income for the Energy and Natural Resource segment was $10 million, up from $7 million in 4Q14.
Liquidity
Plum Creek ended 4Q15 with $88 million in cash and cash equivalents, up from $81 million at the end of 3Q15. Total long-term debt was nearly $1.98 billion, flat on a sequential basis.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON PCL
Portfolio Manager Executive Summary[Note: Only highlighted material has been changed.]
Headquartered in Seattle, WA, Plum Creek Timber Company Inc. primarily owns and manages timberlands in the United States.
Trend of Broker Opinions: Broker sentiment on the stock remains skewed in favor of Neutral rating, with 66.7% of the firms in the Digest group rating the stock neutral, 33.3% renderinga positive rating and none giving a negative rating. Target prices provided by the firms range from a low of $38.00 to a high of $56.00 per share. The average came in at $44.57, implying a negative return of 7.3%.
Neutral or equivalent outlook – Four firms or 66.7% – According to these firms, though Plum Creek’s geographically diversified private timberland portfolio, higher demand for lumber and southern sawlog, and healthy balance sheet augur well, slower pace of growth in the residential construction market, increasingly stringent environmental norms and intensified competition from a variety of substitute products such as non-wood and engineering wood products are causes of concerns. Moreover, the firms believe that it would be adversely affectedby cautious outlook on the rate of improvement of log pricing and lower harvest volumes in the near term.
Positive or equivalent outlook – Two firms or 33.3% – Thesefirms opine that Plum Creek possesses strong long-term asset value and a robust balance sheet with ample liquidity. In fact, the firms believe that as Plum Creek has notable exposure to Southern sawlogs, a revival in housing starts would drive its pricing and in turn, fuel the company’s top-line growth.
December 17, 2015
Overview [Note: Only highlighted material has been changed.]
Based in Seattle, WA, Plum Creek Timber Company Inc. is among the leading publiclyheld timber real estate investment trust (REIT) and owner of private timberland in the U.S. The company produces lumber, plywood and medium density fiberboard (MDF) at the wood-product manufacturing facilities in the Northwest. The company also has natural resource businesses that focus on opportunities resulting from property ownership. It includes the scope for mineral extraction and natural gas production as well as communication and transportation.
Plum Creek reports its operational data under 5 business segments. It includes timberland operations in 2 business segments: the Northern Resources Segment and the Southern Resources Segment.
The Northern Resources Segment comprises timberlands in Maine, Michigan, Montana, New Hampshire, Oregon, Vermont, Washington, West Virginia and Wisconsin. Timber harvested in the Northern Resources segment is sold as logs to domestic mills and used in its own manufacturing facilities as well. The Southern Resources Segment consists of timberland in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina,Texas and Virginia. Logs are sold to third-party mills including manufacturers of lumber, plywood, pulp and paper products.
Among the other segments, Real Estate segment comprises sales of better-use timberland as well as non-strategic timberland. It also operates a real estate development business.
The Manufacturing segment includes lumber mills, plywood plants, lumber-remanufacturing facility and medium density fiberboard facilities. These facilities convert logs to lumber, plywood and other products and convert chips, sawdust and wood shavings to MDF.
Moreover, Plum Creek has the Energy and Natural Resources segment that consists of the natural resource businesses, which focus on opportunities for oil and natural gas production, rock and mineral extraction, wind power and communication and transportation rights of way.
Further information on the company is available on its website:
Key investment considerations according to the firms are as follows:
Key Positive Arguments / Key Negative Arguments- The company, being one of the largest private landowners in the U.S., boastsa diversified land base.
- It capitalizes on the economies of scale and the increasing value of timber over time to offset much of the negative effect of cyclical commodity pricing.
- Leaving aside the short term concerns surrounding the slow recovery of the housing market, the firms believe that in the future, housing market recovery would drive thedemand for wood products and pricing. Specifically, with Plum Creek having significant exposure to Southern sawlogs, a revival in housing starts is expected to drive its pricing and in turn, fuel the company’s top-line and cash flow growth.
- The company’s development strategy is conservative, less risky and requires little capital. Moreover, the company’s plan of selling timberland at full private market price while using the proceeds to buyback shares and repay debt is encouraging.
- Slower pace of growth in the residential construction market remains a looming concern for Plum Creek.
- Moreover, the fall in harvest volumes is a concern and may weigh upon earnings, going forward.
- The company is exposed to risks such as weak paper and wood product markets, poor weather, and threats from fire, which could affect the log harvesting business.
- Plum Creek’s business is subject to strict environmental policies, which have become more stringent in the recent years. The company has to conform to all the state laws and regulations and incur significant expenditure to minimize the adverse effect on the environment, failing which it could face severe penalties.
Note: Plum Creek operates on a calendar-year basis.
December 17, 2015
Long-Term Growth[Note: Only highlighted material has been changed.]
Plum Creek is among the largest and most geographicallydiversified private timberlands in the U.S., with over 6 million acres of timberlandin major timber-producing regions and wood products manufacturing facilities in the Northwest. This enables the company to benefit from large economies of scale and capitalize on the increasing value of timber over time.
The firms believe that the company offers compelling long-term value due to increased demand and pricing in its Resources segments as well as improving fundamentals in the Manufacturing segment. Moreover, these firms expect the Southern timberland buyout to improve the cash flow of Plum Creek going forward. Favorable cash flow continues to ensure the regular payment of dividend.
Plum Creek continues to benefit from productivity gains in its timberland through higher yield and seedling quality, along with greater focus on productive areas. The firms believe that the company’s geographic diversity, conservative balance sheet and excellent liquidity serve it well as it continues to execute strategies that aim at maximizingvalue and investment.
The firms believe that with Plum Creek having notable exposure to Southern sawlogs, any revival in housing starts would drive its pricing of southern sawlogs and in turn, fuel the company’s top-line and cash flow growth.
Apart from these, the firms opine that for investors with a long-term horizon, there are a number of potentially significant events in addition to the anticipated housing recovery. These are the development of bio-power and bio-fuel markets and improvement of carbon markets. Another positive factor is the opportunity to supply wood fiber as a renewable source of energy. The firms believe that Plum Creek has the potential to capitalize on such opportunities.
December 17, 2015
Target Price/Valuation[Note: Only highlighted material has been changed.]
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 33.3%↑
Neutral / 66.7%↑
Negative / 0.0%↓
Average Target Price / $44.57↑
Maximum Upside from Current Price / 16.5%
MaximumDownside from Current Price / -20.9%
Upside from Current Price / -7.3%
Digest High / $56.00↑
Digest Low / $38.00
No. of Analysts with target price/ rating / 7/6↓
Risks that can impede the achievement of target price include weaker-than-expected log volumes and pricing for sawlogs. In addition, in case of recession, there could be significantly weaker land markets, which could delay some of the company’s land sales. Housing market weakness can impact Plum Creek’score timberland profits and manufacturing & Real Estate operations as well.
Recent Events[Note: Only highlighted material has been changed.]
On Nov 8, 2015, Plum Creek and another timberland REIT inked a merger deal to create a $23-billion timber, land and forest products company, the largest in the U.S. The combined entity will own over 13 million acres of productive timberland, which will help it reap economies of scale and capitalize on housing recovery.
On Oct 26, 2015, Plum Creek announced its 3Q15 results. The company’s 3Q15 earnings came in at $0.58 per share, comfortably beating the Zacks Consensus Estimate of $0.51 and the prior-year quarter figure $0.34.
Revenues[Note: Only highlighted material has been changed.]
Plum Creek’s total revenue for 3Q15 came in at $414 million, up10.4% year over year (y/y). However, it lagged the Zacks Consensus Estimate of $434 million.
Segment Performance
Revenues at the company’s Northern Resources segment were $55 million, down 23% y/y.The decline was mainly triggered byreduced sawlog harvest volumes and lower sawlog prices,partly offset by higher pulpwood prices. During the quarter, sawlog harvest volumes declined 28% y/y and sawlog prices declined 4% in 3Q15 y/y. Prices of pulpwood moved up 10% on account of lower log supply in the Northeastern and LakeStates regions of the U.S., earlier this year.
In 3Q15, the Southern Resources segment reported revenues of $136 million, unchangedy/y. During the quarter, modest rise in pulpwood prices were offset by slightly low harvest volumes.
In 3Q15, revenues at the Real Estate segment rose 87%y/y to $129 million. This increasewas mainly attributable to large sale of non-strategic acres during the quarter, partly offset by lower revenues generated from higher and better-use / recreational assets.
The Manufacturing segment recorded 3Q15revenues of $85 million, down7% y/y. The decline was mainly led by a fall in sales volumes and a drop in lumber prices, which were partly offset by a rise in MDF sales volumes.
Finally, during the quarter, the Energy and Natural Resource segment booked revenues of $8 million, unchanged y/y.
Outlook
Plum Creek anticipates a slow recovery in the residential construction market and projects housing starts to reach 1.1 million in 2015. Further, the company expects the housing starts to rise by 14% to around 1.25 million in 2016 and around 1.5 million by 2017. As the residential construction market is growing at a slow pace and the sawmills are adjusting the production levels keeping in mind the weaker price, Plum Creek intends to follow a conservative approach in its operationsfor the rest of the year.
For 4Q15, Plum Creek expects harvest volumes in both the Northern and the Southern Resources segments to remain almost same with the 3Q15 levels. As a consequence, total harvest volume is anticipated at around 18.5–19 million tons in 2015, lower than initial harvest plans of 19–20 million tons for the year.
For the Northern Resources Segment, the company expects the sawlog harvest volumes in 2015 to decline by 15% from the 2014 volumeof 2.3 million tons,due to recent land sales and updates of harvest schedule. Further, the company expects pulpwood harvest volumes in 2015 to remain at par with the 2014 level of 1.6 million tons.
For the Southern Resources Segment, the company expects the sawlog harvest volumes in 2015 to decline by 5% from the 2014 volume of 6.5 million tons, on account of recent production downtime, high mill inventories, and quota restrictions on log deliveries of customers. Further, the company expects pulpwood harvest volumes in 2015 to decline modestly from the 2014 level of 9.3 million tons.
For 4Q15, the company anticipates revenues from sale of real estate in the range of $35–$45 million. In the Energy and Natural Resources segment, Plum Creek expects operating income in 4Q15 to be similar to the 3Q15 level.
Firms anticipate sawlog prices in the U.S. South to remain flat for the rest of the year. However, these firms forsee limited downside for Plum Creek,as the company will continue to take advantage of the disparity between timberland values put forth by public markets and private market transactions.
Margins[Note: Only highlighted material has been changed.]
During 3Q15, total costs and expenses rose3.8% y/yto $300 million. Operating income increased 26.4% y/y to $115 million,while adjusted EBITDA rose30.1% y/y to $203 million in 3Q15.
Segmental Performance
Operating income at the company’s Northern Resources segment fell to $6 millionin 3Q15 from $13 million recorded in the year-ago period.
The Southern Resources segment posted an operating income of $33 million in 3Q15, down from $35 nillion in 3Q14.
In 3Q15, operating income at the Real Estate segment rose sharplyto $84 million from $34 million recorded in the year-ago period,while the Manufacturing segment recorded an operating income of $8 million, down from $16 million in 3Q14.
Finally, during the reported quarter,Energy and Natural Resource segment booked an operating income of $5 million, downfrom $6 million a year ago.
Outlook
The company anticipates incurringtotal capital expenditure of around $90 million in 2015 and $25 million in 4Q15. Further, for 4Q15, it projects third-party interest expense to be around $24 million, andtax expense to be $2 million.
Earnings per Share[Note: Only highlighted material has been changed.]
According to the company, earnings in 3Q15 came in at $100 million, or $0.58 per share. Earnings rosefrom the prior-year quarterfigure of $61 million or $0.34 per share.
Outlook
Plum Creek revisedfull-year 2015 earnings per share guidance in the range of $1.06–$1.11 from $1.05–$1.20. For 4Q15, earnings are expected within $0.13–$0.18 per share comapred with the previous projection of $0.50–$0.55 per share.
Some firms have have loweredtheir 4Q15, 2015 and 2016 EPS estimates based on the 3Q15 results as well as managemant’s guidance.
Balance Sheet/ Investments/ Others[Note: Only highlighted material has been changed.]
Balance Sheet
Plum Creek ended 3Q15 with $81 million in cash and cash equivalents, down from $83 million at the end of the prior quarter. Total long-term debt stood at $2.0 billion, unchanged from prior quarter.
Share Repurchase
In the first nine months of 2015, Plum Creek bought back around 2.5 million shares at an average price of $40.30per share. At the end of 3Q15, the company had $200 million of authorization left under its current share repurchase program.
Outlook
Plum Creek is focused on driving its shareholders’ value through opportunistic share repurchases. Further, the company focuses on disciplined capital allocation to increase the value of its shareholders.