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Plum Creek Timber Company Inc. (PCL - Analyst Report) reported impressive fourth quarter 2012 results. The company’s earnings per share reached 49 cents, significantly surpassing the Zacks Consensus Estimate of 29 cents and the year–ago quarter earnings of 38 cents. Net income for the quarter increased 29.5% from the year-ago period to $79 million.

The better-than expected results at this real estate investment trust (REIT) were driven by increasing demand for wood products stemming from a recovery in the residential construction market, resulting in improved performance by the timber, real estate and manufacturing businesses.  

Total revenue advanced 12.4% year over year to $354 million and exceeded the Zacks Consensus Estimate of $297 million. Adjusted EBITDA (earnings before interest, tax, depreciation and amortization) came in at $150 million and was up 16.3% year over year.

For full year 2012, Plum Creek reported earnings of $203 million or $1.25 per share, up from $193 million, or $1.19 per share earned a year ago. Results also exceeded the Zacks Consensus Estimate of $1.05 per share.

Total revenue advanced 14.7% from the prior year to $1.3 billion and was ahead of the Zacks Consensus Estimate of $1.2 billion. Adjusted EBITDA climbed 18.8% from a year ago to $530 million.

Reflecting positive sentiments of the investors following an upbeat performance by Plum Creek, the stock advanced 3.4% in after-hours trading.

Segment Performance

Northern Resources – This segment reported operating profit of $5 million during the quarter, which was down from $7 million recorded in the year-ago period. Results reflect a dip of 128,000 tons (11.2%) in overall harvest volumes as well as higher road expenses. The negatives were partly mitigated by a slight increase in prices of sawlogs and pulpwood (approximately $1.00 per ton each) from the prior-year period.

Southern Resources – This segment booked an operating profit of $24 million, which surged 26.3% year over year and reflected strong demand for pulpwood. Overall, harvest volumes increased 246,000 tons (7.8%) year over year.

For Pulpwood, harvest volumes escalated 181,000 tons (9.5%) from the prior-year period while prices went up approximately $2.00 per ton to $11.00. For Sawlog, harvest volumes expanded 65,000 tons (5.1%) from the prior-year period while prices remain unchanged at $20.00 per ton.

Real Estate – This segment generated operating profit of $74 million, up 21.3% from the prior-year quarter. The company sold around 47,000 acres of land during the quarter, including sale of the 16,600 acres large, non-strategic western Oregon timberlands for $58 million

Manufacturing – This segment posted operating profit of $7 million in the quarter, which more than doubled from $3 million earned in the year-ago quarter. Results reflect increased prices of lumber, plywood, and medium density fiberboard compared to the prior-year quarter.

Balance Sheet Position

During the reported quarter, Plum Creek generated $116 million of operating cash flow compared with $80 million in the year-ago period. Moreover, at year-end 2012, the company had cash and cash equivalents of $356 million and total long-term debt of $1.8 billion compared with $254 million and $1.3 billion, respectively, at the end of the prior year.

Outlook

Management at Plum Creek remains overtly optimistic about an upbeat performance in 2013. For full year 2013, earnings are expected to range within $1.25 – $1.50 per share and for first quarter 2013, earnings are projected to be in the range of 28 cents – 33 cents per share.

Management expects sawlog prices to improve in 2013, as its customers increase production to meet growing demand resulting from the recovery of the residential construction market and housing starts nearing 1 million units for the first time since 2007. Pulpwood prices are expected to improve in the South while attractive prices in the North are likely to continue.

Total harvest volume is expected to be mostly unchanged in 2013 (between 17.5 and 18.0 million tons of timber compared with 17.9 million ton in 2012). However, the harvest mix is likely to shift with improvement in sawlog demand and pricing.

Recent Developments

Plum Creek has recently taken strategic initiatives that are expected to augment the company’s top line and diversify its business.

In January, the company penned a long-term fiber supply deal with Drax, a power company in the U.K. to supply up to 770,000 tons of sustainably-managed wood fiber annually during the 10-year contract tenure to two U.S. pellet manufacturing sites. The deal would help the company broaden its customer base and offer an opportunity to capitalize on Drax’s strategic transition toward developing a sustainable energy platform.

Moreover, Plum Creek acquired an interest in 4 South Carolina-based quarries for $75 million in the same month. The quarries, with around 144 million tons of crushed stone production, were bought from rock products specialist – Vulcan Materials Company (VMC - Analyst Report).

As per the deal, Vulcan will continue to own and operate the quarries. Conversely, Plum Creek will enjoy royalty payments from the production and sale of crushed stone, mined from the quarries over the next 25 years, starting this month. This deal reflects its strategic move to boost the natural resource businesses.

Our Take

We are encouraged with Plum Creek’s impressive results in the reported quarter and believe that its diversified timber and land base enables it to benefit from large economies of scale.

In addition, the upsurge in demographic trends driving housing markets and demand for real estate properties across the country provide a strong economic backdrop for the company to demonstrate its solid financial performance in the future.

Yet, cyclical nature of the business, cutthroat competition and strict environment policies undermine its long-term growth potential to some extent.

Plum Creek currently has a Zacks Rank #3 (Hold). 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 Potlatch Corporation (PCH - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy) and a Zacks Rank #2 (Buy), respectively.
 

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