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Bull of the Day

The US housing market continues to strengthen this year thanks mainly to improvement in the labor market and record low interest rates. This Zacks Rank #1 (Strong Buy) timber REIT is well positioned to capitalize on the housing market recovery.

About the Company

Structured as a REIT, Potlatch (PCH) owns approximately 1.6 million acres of forestland in Alabama, Arkansas, Idaho, Minnesota and Mississippi. The company also operates five manufacturing facilities that produce lumber and panel products.  Additionally, the company conducts a real estate sales and development business through its subsidiary.

Better-than-expected Results

The company reported Q2 operating earnings of $5.4 million or $0.13 per share, compared with $200,000 or $0.00 per share reported in the first quarter. Earnings were substantially ahead of the Zacks Consensus Estimate of $0.07 per share. The company has beaten in all of last four quarters with an average quarterly surprise of 59%.

Lumber Demand and Price Surging

Per FT, after touching a four-year low in October, lumber future has surged more than 50%.  The rise is mainly a result of increasing demand from the housing market.

We have seen steady growth in housing starts of late, thanks to improving labor markets, rising consumer confidence and record low mortgage rates. Through the first half of the year, housing starts are up about 8% year-over-year and single family starts, that use about three times the amount of lumber as multifamily units, are up almost 15% year-over-year.

Ongoing trade dispute between the US and Canada over softwood lumber imports is likely to keep prices high. US lumber producers allege that the Canadian government subsidizes its lumber producers thereby giving them an unfair advantage in the US lumber market. Rising exports from Canada have raised the possibility that the US government may impose a tariff on Canadian lumber.

Rising Estimates

Zacks Consensus Estimates for the current and next year have increased to $1.12 and $1.46 respectively, from $1.02 and $1.35, before the results. 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 have increased their dividend 20% in the last three years. The dividend yield is 3.9% as of now.
The Bottom Line

PCH is a Zacks Rank#1 (Strong Buy) stock. Additionally, a Zacks Industry rank of 4 out of 265 (top 2%) indicates very strong likelihood of continued strength in the short to medium term.

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