Deltic Timber Axes Cash Flow

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The market took a bit of a dive yesterday, but forgive investors in DelticTimber (NYSE: DEL) if they didn't notice. Bucking market trends, the tree harvester saw its shares rise nearly 1% over the course of the trading day. Clearly, Deltic must be growing like a weed, right? Sales and profits reaching for the sky?

Hardly. Q3 2005 saw Deltic's profits decline from last year's $0.30 to just $0.26 per diluted share. Its sales fell from $43.2 million to $36.8 million year over year.

Honestly, though, those numbers don't really matter much. Like its fellow tree growers, including perennial Fool fave Plum Creek Timber (NYSE: PCL), Deltic makes tactical decisions to sell off parcels of land for residential development from time to time -- Q3 apparently just wasn't one of those times. Land sales contributed a smaller portion of revenue compared to previous quarters.

But while investors rightfully shrugged off the year-over-year decline in profits, the company's earnings release contains further bad news that investors ignore at their peril: Free cash flow declined markedly. Mind you, Deltic follows the lamentable practice of too many public companies: It doesn't publish a cash flow statement with its earnings release. To see the actual numbers, we'll have to wait for Deltic to file its 10-Q with the SEC.

But although the cash flow statement went missing, Deltic did provide the two most crucial numbers we look for in that document: cash generated from operations, and capital expenditures. Year to date, Deltic generated $28.9 million in cash from operations vs. $33.6 million a year ago.

Conversely, the first nine months of 2004 saw Deltic invest just $16.5 million in capital expenditures, but this year, that number rose to $25.2 million. Last year's first three quarters' $17.1 million in free cash flow (FCF) has dried up, and FCF presently stands at only $3.7 million. Contrast that FCF decline with the apparent year-to-date improvement in GAAP profits (up 56% to $12.1 million); or contrast the $12.1 million in GAAP profits with the $3.7 million in real cash profits, and the cry "Timber!" should echo in investors' brains.

Why might a Fool prefer Plum Creek over Deltic? Count the ways, as laid out in the Motley Fool's recent Stock Madness Tournament:

• Stock Madness 2005: Plum Creek Timber vs. Apple Computer
• Stock Madness 2005: Protein Design Labs vs. Plum Creek Timber
• Stock Madness 2005: Plum Creek Timber vs. Audible
• Stock Madness 2005: Headwaters vs. Plum Creek

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Fool contributor Rich Smith has no position in any of the companies mentioned in this article.