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Plum Creek Timber Co. Inc. (PCL - Analyst Report), a real estate investment trust (REIT) owning and managing timberlands in the U.S., reported fiscal 2011 third quarter earnings of $50 million or 31 cents per share, compared with $32 million or 20 cents in the year-earlier quarter. The third quarter 2011 earnings marginally beat the Zacks Consensus Estimate by a penny.

Total revenues for the quarter were $293 million compared with $259 million in the year-ago quarter. Total quarterly revenues were below the Zacks Consensus Estimate of $300 million.

The year-over-year increase in total revenues for the reported quarter was primarily due to a strong performance in the Real Estate segment, partially offset by weaker-than-anticipated results from the Manufacturing segment. With a considerable geographic diversity, Plum Creek was able to adjust its harvest plans during the quarter to capitalize on stronger markets and protect value in the weaker ones.

By segment, the Northern Resources division reported an operating profit of $7 million during the quarter, compared to an operating profit of $5 million in the previous year. During third quarter 2011, sawlog prices were over $4 per ton higher and pulpwood prices were $3 per ton higher on a year-over-year basis due to continued strong demand from pulpwood customers in the region. Total harvest volumes were approximately 0.1 million ton higher during the quarter compared to the year-ago period.

In the Southern Resources segment, operating profit was $21 million compared to $25 million in the year-ago quarter. The year-over-year decline in profit was attributable to unusually dry weather pattern that temporarily increased supply. This was in stark contrast to the wet weather and poor logging conditions in the year-earlier period that resulted in temporary log shortages. Consequently, pulpwood and sawlog prices decreased $2 per ton and $3 per ton, respectively, on a year-over-year basis. Harvest volumes at 3.1 million tons remained 0.24 million tons higher to that of the prior-year levels.

Operating Income in the Real Estate segment was $46 million during the quarter on revenues of $67 million, compared with an operating income of $19 million in the year-earlier quarter on revenues of $39 million. The Manufacturing segment reported an operating profit of $3 million during the quarter, compared to $7 million in the year-ago quarter.

Plum Creek continued to sell large tracts of rural lands including non-strategic timberlands to raise cash. During the reported quarter, the company sold 11,525 acres of small, non-strategic timberlands for $1,230 per acre and 24,500 acres of recreational land at an average price of approximately $1,950 per acre. The company also sold 370 acres of conservation lands for approximately $1,270 per acre. During third quarter 2011, Plum Creek completed the acquisition of 50,000 acres of industrial timberland in northwest Georgia and northeast Alabama from Forestar for $75 million.

During the reported quarter, Plum Creek generated $137 million of operating cash flow compared with $105 million in the year-ago period. At quarter-end, the company had cash and cash equivalents of $291 million and total long-term debt of $1.3 billion, compared with cash and cash equivalents of $267 million and total long-term debt of $1.6 billion in the year-earlier period.

Plum Creek repurchased approximately 670,000 common shares at an average price of $34.87 each during the quarter, as part of its share repurchase program. The company presently has approximately $175 million remaining in its current share repurchase authorization, and 161.6 million shares outstanding.

Management observed that the business environment continued to be challenging as the pace of recovery remained slow and erratic. However, with a diverse timberland portfolio, conservative balance sheet and easy access to capital, the company has the operational and financial flexibility to tide over the storm and provide long-term value to its shareholders.

As sawlog prices in some Southern markets remained relatively unattractive, the company expects its 2011 harvest volume to be similar to that of the previous year with 4 million tons of timber harvest in the fourth quarter. Plum Creek narrowed its fiscal 2011 earnings expectation to $1.18-$1.23 per share. Fourth quarter earnings are expected to be in the range of 37 cents to 42 cents.

We maintain our long-term ‘Underperform’ recommendation for Plum Creek, which currently has a Zacks #4 Rank that translates into a short-term ‘Sell’ rating. However, we have a ‘Neutral’ recommendation and a Zacks #3 Rank (short-term ‘Hold’) for Weyerhaeuser Co. (WY - Analyst Report), a competitor of Plum Creek.

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