It's no secret that home builders are in a funk. They've built
just 500,000 to 600,000 new homes in each of the past three years,
which happens to be the three lowest years on record (the data go
back to 1959). And it's just half the average rate seen during the
past 40 years.
Lumber prices have followed suit, falling sharply from the middle
of the last decade.
Timber is a highly price-sensitive
commodity
, When demand marginally outstrips supply, prices can soar.
Unfortunately, the opposite has been the case in recent years, so
timber companies have been seeing some pretty lean times. Lumber
traded above $400 per 110,000 board feet (of random lengths) in the
middle of the last decade and is now trading at around $270 per
random length today.
Might a turn be at hand?
Although many expect another subpar year for new home construction
in 2012, industry activity may pick up by 2013. Considering the
housing industry's recent period of under-building, there's a lot
of pent-up demand. That's why some say we'll see a million new
homes built annually by 2014 or 2015. This would be a return to
levels seen prior to the recent economic meltdown.
You can already see the improving sentiment toward timber stocks by
glancing at the
Guggenheim Timber ETF (NYSE:
CUT
)
. This
exchange-traded fund (
ETF
)
holds 27 publicly-traded timber and paper producers. Some of those
holdings are outside the United States, so it isn't purely
correlated with housing.
The fund was launched at $25 in 2007, plunged sharply during the
next few years, and still remains below that initial price. But the
recent rebound in housing stocks has led to fresh interest in
timber stocks. That's because an upturn in housing may create an
even greater upward move in timber prices than the homebuilders
themselves. For example, a 20% upturn in housing construction,
coupled with a 30% upward move in timber prices, could
yield
potentially robust share price gains for these timber producers.
Since the CUT ETF (along with the more thinly-traded
iShares S&P Global Timber & Forestry ETF (Nasdaq:
WOOD
)
) may be weighed down by exposure to paper companies as well, a
direct investment in timber producers likely makes more sense.
Most of these companies are structured as
real estate
investment trusts (or REITs), which means they aim for
dividend
payouts rather than share price
appreciation
. Still, a sharp upward move in timber prices would surely boost
shares and help boost payouts.
Take
Plum Creek Timber (NYSE:
PCL
)
as an example. The company saw annual sales rise to $1.6 billion in
2005 through 2008, thanks to a combination of strong
volume
and rising prices for timber. Plum Creek earned an average of $1.55
a share in those years.
Fast-forward to 2012, and sales are now expected to be in the $1.25
billion-range, generating roughly $1.20 a share in
earnings
. Plum Creek has maintained its annual $1.68 a share dividend for
the past five years, and a combination of current cash and ongoing
asset
sales should help maintain the payout.
The best timber REIT
Although some analysts prefer
Weyerhauser (NYSE:
WY
)
or
Potlatch Corp. (NYSE:
PCH
)
, it is
Rayonier (NYSE:
RYN
)
that appears to be the industry player with the greatest operating
momentum. The company's dividend has been steadily hiked to a
recent $1.60 a share, and though that equates to just a 3.6% yield,
shares appear to have the most upside of the group.
Beyond simply owning real estate and harvesting trees, Rayonier has
had strong gains in its performance fibers division, as the
company's cellulose fibers are seeing an increasing number of
industrial applications. The company's 2012 production capacity has
already been sold out, and a new facility in Jesup, Georgia is
likely to also sell out its production capacity. This capacity
makes Rayonier the largest producer of high-performance fibers in
the world.
Although analysts expect sales to grow just 5% in 2012, due in
large part to lower real estate sales, a rebound toward
double-digit growth is expected in 2013. Analysts see earnings
rising about 15% to $2.50 per share in 2013, and notably, those
forecasts assume still-weak demand for timber in housing
construction.
Analysts at DA Davidson say expectations that 2012 will be a slow
year are off the mark. They say the company's recent guidance "was
conservative, given Rayonier's recent history of outperformance,
and would not be surprised if they (sic) handily beat their own
forecast, as they did in 2011." The analysts see shares rising from
a recent $44 to $55. Toss in the 3.6%
dividend yield
, and you're talking about gains of nearly 30%.
Looking for a timber play that isn't a REIT? Check out the
Forestar Group (NYSE:
FOR
)
. The Austin, Texas-based firm owns more than 200,000 acres across
nine states, and some of the land is used for timber harvesting
while other portions are being drilled for oil and gas.
[block:block=16]Forestar doesn't
offer
a dividend, but is a clear value play. The company's stock is
valued just 5% more than tangible
book value
. As demand for both timber and real estate development finally
turn back up, the company's holdings are likely to be valued much
higher.
Risks to Consider:
Further pain in the housing sector would likely keep a lid on
lumber stocks.
Action to Take -->
These stocks may not look especially cheap in the context of 2012
results, but rising timber prices and rising demand for timber in a
housing-related recovery could help tangibly boost these stocks and
ETFs.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.