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Bull of the Day: Potlatch (PCH)

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With strong demand for its products and excellent cost management, Potlatch seems to be in a position to deliver solid earnings growth.

Further, with a solid outlook for the industry, this Zacks Rank #1 (Strong Buy) stock looks very attractive as of now.

About the Company

Structured as a REIT, Potlatch owns approximately 1.42 million acres of forestland in Arkansas, Idaho, and Minnesota. The company also operates six manufacturing facilities that produce lumber and panel products.  Additionally, the company also conducts a real estate sales and development business.   

Excellent Results and Solid Fundamentals

On April 23, 2013, Potlatch reported its first quarter earnings.Total revenues for the quarter were $139.3 million, and the net income for the quarter was $15.5 million, or $0.38 per diluted share. The results beat both on the revenue and the earnings front.

Results benefitted from strong demand for lumber and significant recovery in lumber prices. Further, growing demand for rural and recreational properties resulted in solid results for the real estate segment.

Additionally, the company continues to maintain a conservative capital structure and focuses on reducing its expenses. Both S&P and Moody’s recently upgraded PCH’s credit ratings.

Positive Earnings Estimates Revisions

As a result of improving outlook for the company, analysts have been revising their estimates for the June 2013 quarter and the fiscal year 2013. Zacks consensus estimates for the second quarter and the fiscal year 2013 now stand at $0.30 and $1.68 per share, respectively, up sharply from $0.19 and $1.25 per share, 30 days ago.

Solid Industry Outlook

With a Zacks Industry Rank of 8 out of 265, Building Products/Wood industry is expected to outperform significantly in the near-to-mid term.

Better Play on Housing Recovery?

As a result of improving sentiment, home construction companies and homebuilder ETFs have been on the run in the past few months and some of them already look quite expensive.

From valuation perspective, timber industry looks quite attractive now. Continued pickup in the housing construction and remodeling activities will result in increased demand for wood.

Further, most timber companies deferred their harvest when the demand for wood was low while their assets (trees) continued to grow and so as the housing market returns, the cash flows from harvest operations will increase in a big way.

Lumber prices have been soaring of late and will continue to benefit timber companies.

The Bottom Line

PCH is a Zacks Rank#1 (Strong Buy) stock. It also has a longer-term Zacks recommendation of “Outperform”. Additionally, a Zacks Industry rank of 8 out of 265 indicates very strong likelihood of continued strength in the short to medium term, compared to other industries.

Further with a dividend yield of 2.6%, excellent fundaments and a solid growth potential, I believe that this stock will be a nice addition to any portfolio.

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