Plum Creek Lowered to Underperform - Analyst Blog

We have recently changed our long-term recommendation for Plum Creek Timber Co. Inc. (PCL) from Neutral to Underperform as we anticipate it to perform well below the broader market. The stock presently has a Zacks #5 Rank, which translates into a short-term ‘Strong Sell' rating.

In the last 30 days, fiscal 2010 earnings estimates of Plum Creek have been lowered by all the 12 analysts covering the stock, while fiscal 2011 earnings estimates were revised downward by 11 of the 13 analysts covering the stock. This indicates a clear negative directional movement for the fiscal earnings.

The magnitude of the earnings estimates has also reduced by 14 cents each for fiscal 2010 and fiscal 2011 to $1.32 and $1.41, respectively, in the last 30 days. This further indicates that the analysts are bearish about the long-term performance of the company.

Plum Creek's business is affected by the cyclical nature of the forest products industry. In addition, prices for logs and manufactured wood products remain highly volatile. As such, factors beyond the direct control of the company undermine its long-term growth potential.

In addition, Plum Creek operates in a cutthroat market and competes with national and local players on a number of factors, including quality and price. Furthermore, wood products face increasing competition from a variety of substitute products such as non-wood and engineering wood products. Consequently, the company is under severe stress to maintain profitability.

However, Plum Creek is the largest publicly held timber REIT, and owns the largest and geographically most diverse private timberland in the U.S. This enables the company to benefit from large economies of scale and capitalize on the increasing value of timber over time to offset several negative effects of cyclical commodity pricing.

The company is also likely to continue to defer harvest and sale of non-core timber assets in order to fund its dividend and maintain significant liquidity. This defensive behavior could reverse the fortunes of the company in the long-term.

Plum Creek's diverse timber and land base also provides excellent operational flexibility to respond to changing market conditions amid a challenging macroeconomic environment. In addition, the upsurge in demographic trends driving housing markets and demand for real estate properties across the nation provides a strong economic backdrop for the company to demonstrate solid financial performance in the future.

Rayonier Inc. (RYN), one of the peers of Plum Creek, however, has a Zacks #3 Rank, translating into a short-term ‘Hold' rating.

 
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RAYONIER INC (RYN): Free Stock Analysis Report
 
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