Plum Creek-Drax Ink Long-Term Deal

Plum Creek Timber Company, Inc., (PCL - Analyst Report) penned a long-term fiber supply deal with Drax, a power company in the U.K. As per the deal, up to 770,000 tons of sustainably-managed wood fiber would be supplied by Plum Creek annually during the 10-year contract tenure to two U.S. pellet manufacturing sites.

Drax, which is currently focused on being a major biomass-fueled power generator, intends to build two pellet mills in Mississippi and Louisiana. The mills would help convert wood fiber into pellets, which in turn would be exported to the company’s U.K. based power stations. The deliveries are expected to commence in 2014.

We are encouraged by Plum Creek’s deal, as it would help the company broaden its customer base. Further, it offers the company an opportunity to capitalize on Drax’s strategic transition toward developing a sustainable energy platform. Such a deal is expected to expand the company’s top line going forward.

Last week, Plum Creek acquired an interest in four South Carolina-based quarries for $75 million. The quarries, with around 144 million tons of crushed stone production, were bought from rock products specialist – Vulcan Materials Company (VMC - Analyst Report). The investment would help Plum Creek boost its natural resource businesses, that helped generate around $5 million of revenues in the third quarter of 2012.

Plum Creek is the largest publicly-held timber REIT, with a diversified timber and land base that enables it to benefit from large economies of scale. The company is scheduled to release its fourth-quarter 2012 results after the closing bell on Jan 28, 2013. The Zacks Consensus Estimate for the company’s fourth-quarter earnings is currently pegged at 29 cents per share.

Zacks Earnings ESP (Expected Surprise Prediction; for more information, please read Zacks Earnings ESP: A Better Method) for Plum Creek is -3.45% for the fourth quarter. This, along with its Zacks Rank #3 (Hold), reduces the chances of a positive earnings surprise.

A number of companies that are performing better and are worth a look in the same industry include Louisiana-Pacific Corp. (LPX - Snapshot Report) and Weyerhaeuser Co. (WY - Analyst Report), carrying Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy), respectively.