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On Apr 11, 2013, we reiterated our long-term recommendation on Plum Creek Timber Company Inc. (PCL - Analyst Report), a timber real estate investment trust (REIT), at Neutral. The move reflects the company’s solid operating platform, impressive fourth-quarter results and recent deals. Yet, the cyclical nature of the business, cut-throat competition and strict environment policies remain our concerns; hence, we believe that the risk/reward profile is currently balanced.

Why Neutral?

Plum Creek is a leading publicly-held timber REIT, and owns the largest and most geographically diversified private timberland in the U.S., which enables the company to benefit from large economies of scale.

Its deal with Drax and Vulcan Materials Company (VMC - Analyst Report) will auger well for its top line. In addition, the upsurge in demographic trends driving housing markets and demand for real estate properties across the country provides a strong backdrop for the company to demonstrate its solid financial performance in the future.

Moreover, Plum Creek 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 per share. The better-than-expected results were driven by increasing demand for wood products stemming from a recovery in the residential construction market, leading to improved performance by the timber, real estate and manufacturing businesses.

Over the last 60 days, the Zacks Consensus Estimate for 2013 has increased by 0.7% to $1.40 per share, while the Zacks Consensus Estimate for 2014 by 1.2% to $1.67 per share. Moreover, Plum Creek has now delivered positive earnings surprises in 2 out of 4 quarters with an average beat of 23.2%. Hence, Plum Creek now has a Zacks Rank #1 (Strong Buy).

However, Plum Creek’s business is affected by the cyclical nature of the forest products industry. It operates in a cut-throat market and wood products encounter increasing competition from a variety of substitute products such as non-wood and engineering wood products. In addition, Plum Creek’s business is subject to strict environment policies, which in general have become increasingly stringent in recent years. This considerably affects the bottom-line growth of the company. Hence, we have a long-term Neutral recommendation on the stock.

Other Stocks to Consider

REITs that are also currently performing well include Federal Realty Investment Trust (FRT - Analyst Report) and Cousins Properties Incorporated (CUZ - Analyst Report), both carrying a Zacks Rank #2 (Buy).
 

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