How High Can Plum Creek Earnings Grow?

Plum Creek Timber (NYSE: PCL  ) will release its quarterly report on Monday, and thanks to the rebound in the housing market over the past year, makers of wood products for home construction have benefited from favorable economic tailwinds for the first time in years since the end of the housing bubble. Yet even though volatility in lumber prices might limit short-term growth in Plum Creek earnings, the long-term prospects for the company look favorable as it has a big competitive advantage over some of its peers in the space.

Arguably, the biggest benefit Plum Creek Timber and its peers have is the fact that its products are naturally renewable. Yet given that trees take decades to grow to maturity, timber companies have to take a long-term approach to operating their business in order to maximize not only short-term profits but long-term prospects for the company years down the line. Let's take an early look at what's been happening with Plum Creek Timber over the past quarter and what we're likely to see in its quarterly report.

Stats on Plum Creek Timber

Analyst EPS Estimate

$0.23

Change From Year-Ago EPS

4.5%

Revenue Estimate

$302.83 million

Change From Year-Ago Revenue

3%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Will Plum Creek earnings see the light?
Analysts have chopped down their short-term views on Plum Creek earnings in the past few months, slashing a third from their June estimates. Yet they've reduced their full-year 2013 consensus figures much more modestly, by just $0.04 per share, and the stock has held up reasonably well in light of the dour quarterly forecast, falling 6% since late April.

Plum Creek entered the quarter on a strong note, as the real estate investment trust nearly doubled its earnings in the first quarter. Although its timber business saw solid sales growth of nearly 10%, revenue in its manufacturing and real-estate segments grew at an even more impressive pace. In order to meet heightened demand for lumber and structural panels for construction, Plum Creek chose to restart sawmill operations at a plant that hadn't been active in four years. As a result of its earnings strength, Plum Creek raised its dividend by 5% in May. With its REIT status, Plum Creek has to pay out 90% of its earnings in dividends in order to gain favorable tax benefits.

This quarter, though, pricing trends haven't been as favorable, with lumber prices losing as much as 25% of their value before bouncing back somewhat. Moreover, Plum Creek has faced more of a competitive threat from rival Weyerhaeuser (NYSE: WY  ) , which bought up 645,000 acres of prime Pacific Northwest timberland from Brookfield Asset Management and its Brookfield Infrastructure Partners affiliate last month. The buy gives Weyerhaeuser more assets with easy access to export markets across the Pacific Ocean in Asia, although the Pacific Northwest does have closer proximity to areas destroyed by the mountain pine beetle.

Even with those unfavorable conditions, though, fellow forest-products REIT Rayonier (NYSE: RYN  ) reported second-quarter sales that more than doubled from year-ago levels thanks to the company's boost in ownership of a joint venture in New Zealand from 26% to 65%. Even excluding those effects, higher sawlog demand in its Gulf of Mexico region and strong export demand for its Pacific Northwest products offset higher logging costs. Those gains were much healthier than what Rayonier experienced in its performance-fibers division, but the company expects to exit the higher-cost portion of that business segment. Rayonier's results set the stage for similar performance from Plum Creek.

In the Plum Creek earnings report, watch for the REIT to discuss any strategic plans it may have to make land acquisitions or buy other assets. In addition, comments about the state of the housing market in light of rising interest rates could point toward Plum Creek's ability to keep growing strongly in the quarters and years to come.

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