Plum Creek Timber Company Inc. Annual Valuation – 2015 $PCL

REITs often attract a great deal of investors because of their strong cash flows and dividends, and those investors often overlook other parts of the business, choosing to analyze the company under a different set of criteria than companies in other sectors.  This can create a problem in that it becomes difficult to compare a REIT to an industrial, which is fine if you use the typical top-down approach to stock selection; however, a top-down approach invites speculation in the fact that you are theorizing which sector will perform well going forward.  Benjamin Graham taught that we should avoid speculation as much as possible, which is why it is critical to develop a system for analyzing companies that will allow them to be compared across industries.  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 investment opportunity.  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 Company Inc. (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 owned approximately 6.8 million acres of timberlands located in 19 states. The Company operates in two segments: the Northern Resources Segment consists of timberlands in Maine, Michigan, Montana, New Hampshire, Oregon, Vermont, Washington, West Virginia and Wisconsin; and the Southern Resources Segment consists of timberlands in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Texas, and Virginia. It’s Energy and Natural Resources Segment includes oil and natural gas production, construction aggregates and mineral extraction, wind power and communication and transportation rights of way. The Real Estate Segment comprises sales of timberlands and non-strategic timberlands. Its Manufacturing Segment includes two lumber mills, two plywood mills and two MDF production lines in Montana and one lumber remanufacturing facility in Idaho.

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 = 2/5

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:

Recent Price	$41.60
MG Value	$6.14
MG Opinion	Overvalued
Value Based on 3% Growth	$17.09
Value Based on 0% Growth	$10.02
Market Implied Growth Rate	13.40%
Net Current Asset Value (NCAV)	-$18.12
PEmg	35.29
Current Ratio	0.45
PB Ratio	4.53

Balance Sheet - March 2015

Current Assets	$275,000,000
Current Liabilities	$609,000,000
Total Debt	$2,759,000,000
Total Assets	$5,086,000,000
Intangible Assets	$0
Total Liabilities	$3,468,000,000
Outstanding Shares	176,200,000

Earnings Per Share

2015 (estimate)	$1.05
2014	$1.21
2013	$1.30
2012	$1.25
2011	$1.19
2010	$1.31
2009	$1.44
2008	$1.37
2007	$1.61
2006	$1.75
2005	$1.92

Earnings Per Share – ModernGraham

2015 (estimate)	$1.18
2014	$1.25
2013	$1.28
2012	$1.28
2011	$1.32
2010	$1.43

Dividend History

Conclusion:

Plum Creek Timber Company Inc. is not suitable for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, insufficient 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 as well as the lack of earnings growth over the last five years.  As a result, all value investors following the ModernGraham approach should explore other opportunities at this time.  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $1.32 in 2011 to only an estimated $1.18 for 2015.  This level of growth does not support the market’s implied estimate of 13.4% annual earnings growth over the next 7-10 years, leading the ModernGraham valuation model to return an estimate of intrinsic value falling below the current price.  As a result, the company is considered to be overvalued at this time.

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 Company Inc. (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.

Disclaimer:  The author did not hold a position in any 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.