Fool.com: A Tale of Timber and Love [Special] May 5, 2004

This is part of The Motley Fool's annualStocks for Mom special.

Plum Creek Timber (NYSE: PCL)
Trading at $30.60 as of 5/4/04
52-week high: $33
52-week low: $23.23

So, Bill, in celebration of Mother's Day you're highlighting a company that owns 8 million acres of timber? Doesn't sound like a very "mom" kind of idea, does it?

Well, it would if you knew my mom. It would make even more sense if you'd known her dad, whom everyone knew as "Big Joe." Big Joe worked with the Forestry Service in western North Carolina for his entire working life, and instilled in all of us a love of the outdoors. We've grown up in and around the forestry business. We've got xylem and phloem in our bloodstreams. So a timber and forestry company that also happens to be a pretty good-looking investment idea is, well, perfect for my mom. Let the other moms learn about consumer products and whatnot. For my mom, we're gonna talk timber.

There are a number of compelling timber and wood products companies, including Georgia Pacific(NYSE: GP), Rayonier(NYSE: RYN), Weyerhaeuser(NYSE: WY), Deltic Timber(NYSE: DEL), Masisa(NYSE: MYS) and Louisiana-Pacific(NYSE: LPX). But my favorite investment idea is Plum Creek Timber(NYSE: PCL).

Here's the skinny on Plum Creek. It's a Seattle-based real estate investment trust that manages timberland in 21 states throughout the country with the largest portions represented in the Southeast, as well as the Pacific Northwest. Plum Creek manages its acreage for timber harvest, and also operates 10 wood products manufacturing facilities throughout the country. The company also highlights the fact that it manages its land to ensure that conditions are suitable for non-game wildlife -- that it can be used for hunting, fishing, and other recreational use.

Recent earnings at Plum Creek have been pretty spectacular, as demand for timber from homebuilders and other construction remains high. I don't believe that homebuilding demand will remain this high, and I'd expect a resultant drop in demand to impact earnings and thus the company's stock price. But, you know what? While short-term earnings can have positive or negative impacts, for a timber REIT, they don't matter so much.

If demand drops, Plum Creek simply lets its trees continue to grow. Which they do, all by themselves. Plum Creek plants more than 85 million trees annually, and, as we read this, each one is storing value. The larger the trees, the more valuable the wood -- small trees will be used for pulp for paper. Bigger, older trees can be used for saw wood, with the remnants also being stock for pulp. So, guess which is more valuable?

Timber is a store of value that has some of the same arguments as gold -- there are no hidden timberland stores out there that would cause sudden supply issues. "Hey! We just discovered that the center of Greenland is covered not with ice, but with millions of ash trees!" Not going to happen, and as such timber is a great hedge against inflation, an asset that tends to move in the opposite direction as the dollar and stocks but with lower volatility. Unlike gold, timber also has an income-generation element to its economics. And demand for timber, though beset by some levels of fluctuation, is consistently robust.

Timber has been on a 20-year rise in price, and in fact over the last 100 years, there are few commodities that have done better. According to an article from Motley Fool Income Investor author Mathew Emmert, a diversified timber portfolio has returned about 13% per year over the last 40 years. Timber is an investment for people who are capable of thinking in decades, because sometimes companies that push to meet short-term earnings in this business can hamstring themselves for years to come. After all, you can't harvest a tree twice.

Here's why I like Plum Creek Timber: Two years ago, the company was hit with a supply glut and had the choice of taking on debt or mowing down some less mature trees in order to meet its at-the-time dividend. Remember the store-of-value argument above -- where trees grow more valuable as assets, the longer companies wait before cutting them -- and you'll see why I think it's such a positive that management instead cut their dividend instead of acre after acre of immature trees. Even so, the dividend sits at a none-too-shabby 4.7%, while Plum Creek's assets are valued at less than $1,000 per acre.

Stable value, undervalued assets, homage to my Mom's family history in forestry, conservative management, and income generation that has the potential to rise from present levels mean that I can highlight Plum Creek Timber with extreme confidence.

If you like stocks that pay fat dividends, you might likeMotley Fool Income Investor. Take a free trial. Bill Mann owns none of the companies mentioned in this article.

A Stock for Mom represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts. The Fool has a disclosure policy.


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