Plum Creek Timber Co. Inc. (PCL) Annual Valuation – 2014

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Low PEmg Companies for the Enterprising Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Plum Creek Timber Co. (PCL) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Plum Creek Timber Company, Inc. (Plum Creek) is a private timberland owner in the United States. The Company timberlands are diversified, not only geographically, but also by species mix and age distribution. Plum Creek manages its timberlands in two business segments: the Northern Resources Segment, consisting of timberlands in Maine, Michigan, Montana, New Hampshire, Oregon, Vermont, Washington, West Virginia and Wisconsin, and the Southern Resources Segment, consisting of timberlands in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina and Texas. In April 2013, it announced the completion of the purchase of approximately 46,000 acres of timberlands in western Georgia and eastern Alabama from the Campbell Group, LLC. In December 2013, Meadwestvaco Corp completed the sale of U.S. forestlands to Plum Creek Timber Company.

PCL data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
3. Earnings Stability – positive earnings per share for at least 5 years – PASS
4. Dividend Record – currently pays a dividend – PASS
5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary

Key Data:

MG Value	$4.48
MG Opinion	Overvalued
Value Based on 3% Growth	$18.36
Value Based on 0% Growth	$10.76
Market Implied Growth Rate	13.01%
Net Current Asset Value (NCAV)	-$18.25
PEmg	34.52
Current Ratio	1.08
PB Ratio	4.22

Balance Sheet – 12/31/2013

Current Assets	$633,000,000
Current Liabilities	$588,000,000
Total Debt	$3,197,000,000
Total Assets	$5,695,000,000
Intangible Assets	$14,000,000
Total Liabilities	$3,863,000,000
Outstanding Shares	177,000,000

Earnings Per Share

2013	$1.30
2012	$1.25
2011	$1.19
2010	$1.24
2009	$1.44
2008	$1.37
2007	$1.60
2006	$1.74
2005	$1.79
2004	$1.84

Earnings Per Share – ModernGraham

2013	$1.27
2012	$1.27
2011	$1.30
2010	$1.40
2009	$1.52
2008	$1.59

Dividend History

PCL Dividend data by YCharts

Conclusion:

Plum Creek Timber Co. is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, the lack of sufficient earnings growth over the last ten years, and the high PEmg and PB ratios.  The Enterprising Investor is concerned with the high level of debt relative to the current assets and the lack of earnings growth over the last five years.  As a result, value investors following the ModernGraham approach should explore other opportunities through a review of 5 Undervalued Companies for the Defensive Investor and 5 Undervalued Companies for the Enterprising Investor.  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $1.52 in 2009 to $1.27 in 2013.  This demonstrated drop in earnings clearly does not support the market’s implied estimate of 13.01% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well below the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Plum Creek Timber Co. (PCL)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

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Disclaimer:  The author did not hold a long position in Plum Creek Timber Co. (PCL) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.