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Bull of the Day: Potlatch (PCH)

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Structured as a REIT, Potlatch (PCH - Free Report) owns approximately 1.4 million acres of forestland in Alabama, Arkansas, Idaho, Minnesota and Mississippi. The company also operates five manufacturing facilities that produce lumber and panel products. They are among the top 10 lumber manufacturers in the US.

Additionally, the company conducts a real estate sales and development business through its subsidiary.

Solid Results

The timber REIT reported adjusted net income of $25.7 million, or $0.62 per share for Q4 2017, up from $14.4 million, or $0.35 per share for Q4 2016.

 “Higher lumber prices and solid execution by each of our three businesses led to very strong financial results in 2017,” said the CEO. “Operating income in both our Northern Resource business and Wood Products segments were at record levels.”

Merger with Deltic

Along with Q3 results, the company also announced a definitive agreement to combine with Deltic Timber in an in an all-stock transaction expected to close in first half 2018. The combined company will have diversified timberland base of ~2 million acres and 1.2 BBF lumber capacity.

Rising Estimates

Zacks Consensus Estimates for the current and next year have increased to $2.97 and $2.79 respectively, from $2.72 and $2.88, before the results. Rising estimates sent the stock to a Zacks Rank #1 (Strong Buy).

The following chart shows earnings and price momentum for PCH:

Returning Capital to Shareholders

The company has been returning a lot of cash to shareholders via dividends and buybacks. They increased their dividend by 20% in 2013 and 2014. In October last year, they again increased the dividend by 7%.

The dividend yield is 3.5% as of now.

Lumber Demand and Price Surging

Lumber prices have been rising since last year, thanks mainly to the ongoing trade dispute between the US and Canada.

NAFTA renegotiations could also lead to lower imports from Canada and drive domestic lumber prices further up.

Last month, Canada filed a complaint with the WTO saying: “The US Department of Commerce’s decision on punitive countervailing and anti-dumping duties against Canada’s softwood lumber producers is unfair and unwarranted.”

Of all timber REITs, Potlatch has highest leverage to lumber prices thanks to their lumber manufacturing business and sawlogs indexed to lumber prices.  Per Potlach “a $30/mbf change in lumber prices represents about $25 million of annual EBITDDA.”

Lumber demand has been rising due to the strength in housing markets. Damage caused by hurricanes in Florida and Texas, and wildfires in California is likely to continue to boost the demand for lumber.

The Bottom Line

PCH is a Zacks Rank#1 (Strong Buy) stock with a Momentum Score of “A”. Additionally, the industry and sector ranks are in the top 7% and top 13% respectively. Further, with a juicy dividend yield of 3.5%, the stock is worth a look.

 

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