NEW YORK: The US lumber industry has recently witnessed an increase in production, following housing activity that augurs well for timber producers benefiting from rising demand and pricing.
A good example is Weyerhaeuser Co that not only harvests trees, but also makes plywood, builds homes and produces cellulose fiber used to make diapers and cigarette filters. The company still has a large network of lumber mills in its portfolio, even after many rival mills shut down during the recession.
“The supply chain in the wood products industry was largely destroyed in the housing depression,” said Vertical Research Partners analyst Chip Dillon. “So as a result, if you are a survivor like Weyerhaeuser and you have a lot of lumber mills, you’re in great shape.”
Weyerhaeuser is well-positioned to take advantage of growth opportunities in the housing market recovery, spokesman Anthony Chavez said.
In contrast, Plum Creek Timber Co, has doubled down on timberland and produces little plywood. That shields it somewhat from volatile housing prices, but it does not benefit as much in a recovery, analysts say.
Plum Creek, the largest private US landowner, has also relied since 2005 on sales of valuable timberland to pay its quarterly dividend. The company’s land holdings fell 18 per cent to 6.6 million acres at the end of 2011 from the end of 2007.
“A significant portion of their cash flow is from selling land,” Morningstar analyst Daniel Rohr said. “That’s one reason why I’m less bullish on Plum Creek than other timber and lumber producers.”
Plum Creek plans to sell at least 1 million acres considered “nonstrategic” during the next 15 to 20 years and is purposely harvesting fewer trees until demand improves further, according to CEO Holley.
“One great thing about timber is that you don’t have to cut the trees,” he said. “If you don’t like the price, you wait until tomorrow or the next year.”
Croft, the investor, does not see the Plum Creek land sales as a bad thing. As a large shareholder, he considers the quarterly dividend payout one of the stock’s primary attractions.
“There is an expectation of paying the dividend, and they’re able to that in a really tough environment,” he said. “People penalize them for that, but it’s actually a good thing about the company.”
Applications for homebuilding permits in the United States are near three-year highs, increasing 2.6 per cent in April to 717,000 units, according to the Commerce Department.
While the numbers are not nearly as robust as they were before the recession — homebuilding permits totaled 1.53 million units in April 2007 — they are a sign of recovery in the housing market and, by extension, the timber industry.
“I feel like you’re getting very close to the point where you’d want to be in these stocks,” said Longbow Research analyst Joshua Zaret. “We don’t think the timber shares are reflecting a positive view of the housing market.”
So far this year, US lumber prices have increased 14 per cent. By comparison, shares of US market leader Weyerhaeuser have risen 9 per cent, while second-ranked Plum Creek is up just 2 per cent.
Wall Street price targets show a jump of 10 per cent to 17 per cent in shares of timber and lumber producers in the next 12 months, and analysts say they are already attractive investments because of their dividend yields of 3 per cent to 4 per cent.
Those dividend payouts are higher than at home improvement retailers like Home Depot Inc and Lowe’s Cos Inc, as well as at builders like KB Home. Stocks like these are alternatives for investors seeking exposure to a housing rebound.
Such a recovery is certainly not guaranteed, and a downturn could hurt timber and lumber shares. Plum Creek Chief Executive Officer Rick Holley told Reuters that he was “cautiously optimistic” that housing demand would increase, especially if mortgage markets loosen up. “A year ago, I looked down the tunnel, and it was pitch-dark,” Holley said. “Now I see a light in the tunnel, and I just hope it’s not a train.”
Annual earnings from Weyerhaeuser, Plum Creek and smaller rival Potlatch Corp look set to jump at least 30 per cent from 2012 to 2013, according to Thomson Reuters StarMine, which analyzes top analysts’ recommendations.
“Right now in the timber space, all the elements are coming together for long-term strong performance,” said Kent Croft, co-manager of the Croft Value Fund, which owns shares of Weyerhaeuser and Plum Creek. “I don’t think the long-term strength of the housing market is baked into these stocks.”
Like most areas of the economy, the housing sector tends to operate in cycles, and investment experts say some timber plays are more attractive than others as a result.
Meanwhile, Senate Finance Committee Chairman Max Baucus last month applauded the two-year extension of the US-Canada Softwood Lumber Agreement (SLA) through October 12, 2015 as an important step for American lumber producers and workers. The SLA protects American lumber producers against unfair trade practices by Canada and provides for binding arbitration to resolve disputes.
“Extending the Softwood Lumber Agreement will maintain a more level playing field for lumber producers in Montana and across the country,” said Baucus.
“As our economy recovers and folks look for jobs, we need to do all we can to protect our lumber producers. Strong enforcement of the softwood lumber agreement is the best way to continue getting strong results that benefit our lumber producers and protect jobs.”
Chairman Baucus has pushed for the US Trade Representative to pursue cases against Canada under the SLA in three instances. In two of those cases, the tribunal set up by the SLA agreed with the United States.