Plum Creek Timber Co. Inc. (NYSE:PCL), one of the largest private timberland owners in the U.S., is down some 10.5% over the past month, which is well above the 2.5% pullback in the S&P 500. Now appears to be a great time to buy this market-leading timber REIT.
Plum Creek Timber Co. Inc. (NYSE:PCL) is one of the largest private owners of timberland in the U.S., owning some 6.6 million acres of timberland in 19 states and offering investors an impressive 3.9% dividend yield.
The real tailwinds for the stock should be a rebounding housing market. S&P expects housing starts to surpass 1 million in 2013 and then reach 1.3 million units in 2014. The timber grown and processed by the major timber REITs is a fundamental input in home building.
What makes Plum Creek Timber Co. Inc. (NYSE:PCL) a great pick is that unlike its peers (mentioned later), the REIT has a heavy weighting toward wood products and real estate. Its timber operations account for nearly 50% of revenue, with real estate operations at 25%.
Plum Creek Timber Co. Inc. (NYSE:PCL) has been under-performing its major peers over the past five years.
I believe this has been due in large part to Plum Creek Timber Co. Inc. (NYSE:PCL)’s enviable exposure to the real estate industry, which, until now, has been a negative for the company. As a result, I think Plum Creek is the best industry-pick going forward.
Plum Creek also has impressive value in its land holdings. The REIT plans to develop over 70,000 acres of land over the next decade and a half. This should come as timber prices rise thanks to the increasing demand in the housing markets.
Other notable timber REITs include Rayonier Inc. (NYSE:RYN) and Weyerhaeuser Company (NYSE:WY). Rayonier produces and markets timber, specialty fibers and wood products. This REIT owns, leases or manages 2.7 million acres of timberland in the U.S., New Zealand and Australia.
Although Rayonier Inc. (NYSE:RYN) is a timber REIT, it appears to have less exposure to the overall housing boom. The REIT gets 70% of revenue from fibers, which makes products used in acetate textile fibers, photographic film, impact-resistant packaging, cigarette filters and food products.
Earlier this year, Rayonier Inc. (NYSE:RYN) sold off its woods-products segment to International Forest Products, which goes hand-in-hand with the REIT’s strategy of shifting its manufacturing operations to specialty chemicals. Although Rayonier is still considered a timber REIT, I think its over reliance on the fibers segment makes it an unattractive play on housing. Rayonier Inc. (NYSE:RYN) also pays the lowest dividend yield of the major timber REITs at 3.3%.
Weyerhaeuser Company (NYSE:WY)’s wood-products segment is the revenue workhorse, generating over 40% of revenue, while the cellulose-fibers segment generates only 26% of revenue. Timberland (15% of revenue) and real estate (15%) round out the remaining parts of Weyerhaeuser’s revenue.
Big news of late for Weyerhaeuser Company (NYSE:WY) includes its big purchase of Longview Timber for $2.6 billion. This is one of the largest North America forestry acquisitions in recent history. The deal will add 645,000 acres of timberland in Washington state and Oregon to Weyerhaeuser Company (NYSE:WY)’s portfolio and is expected to be immediately accretive to funds for distribution.
The Weyerhaueser-Longview deal is the third-largest acquisition over the past 15 years behind only Resource Management Service’s $5 billion purchase of International Paper’s assets in 2006, and Plum Creek’s $3.3 billion acquisition of Georgia-Pacific in 2001.
With the purchase, Weyerhaeuser noted it is now considering the spin-off of its home-building and real estate development business to focus more on developing wood products.
Going into the second quarter, there were a total of 13 hedge funds long Rayonier Inc. (NYSE:RYN), an 8% increase from the previous quarter. The top hedge fund owner had a $227 million position and it was Jean-Marie Eveillard’s First Eagle Investment Management (check out First Eagle’s high yielders).
First Eagle also has an affinity for both Weyerhaeuser Company (NYSE:WY) and Plum Creek Timber Co. Inc. (NYSE:PCL), having the top position among hedge funds in both. For Plum Creek, there were a total of 12 hedge funds long the stock. Behind First Eagle’s top position was Markel Gayner Asset Management in second with an $18.3 million position (check out Markel’s newest stock picks).
For Weyerhaeuser Company (NYSE:WY), there were a total of 33 hedge funds long the stock, with Third Avenue Management having the second-largest position worth $194 million and accounting for 3.7% of its 13F portfolio (see Third Avenue’s top picks).
I’ve had an appreciation for timber REITs over the past few months, with my top pick being Rayonier given the company’s high margins; however, with the recent pullback in Plum Creek, it’s time to reconsider.
Rayonier Inc. (NYSE:RYN)’s exposure to the high-margin, high-barriers-to-entry fibers business is impressive, but I like Plum Creek Timber Co. Inc. (NYSE:PCL) due to its exposure to the housing industry via its greater reliance on timber and real estate, even compared to Weyerhaeuser. And Plum Creek offers investors an impressive 18% return on equity, compared to Weyerhaeuser Company (NYSE:WY)’s 11.5%.
The article How to Build Up Your Portfolio originally appeared on Fool.com and is written by Marshall Hargrave.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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