One of the hardest things to do in the investing world is to not buy the stock of a company you really like. I've wanted to own timber REIT Plum Creek Timber
It was a somewhat challenging quarter for Plum Creek. Revenue was up 6%, but operating income dropped 3% and net income fell 10%. Within that revenue line, timber sales were essentially flat and the company's growth came almost solely from the 44% growth in the small real estate business.
The biggest problem with the quarter was a glut of timber in the western areas of the company's southern operating division. Thanks in part to post-hurricane timber salvage, prices for sawlogs were down 8% in this area and pulpwood prices dropped 25%. That in turn led to a drop in average selling prices for the southern region overall, and the company cut its harvest back about 10%.
All the same, that's part of what I really like about the timber business -- if you don't like today's prices, wait a year and the value of your timber generally goes up. Now, that's a bit oversimplified, and there is a point where the economic returns of further growth start to diminish. But the fact remains that timber is a business in which it can really pay to have the luxury of being patient.
It's also important to realize that Plum Creek continues to explore non-traditional alternatives to making money. The company participates in some real estate development joint ventures and has begun to sell timberlands where the underlying value of a different use (recreation, conservation, housing, etc.) is higher. While timberlands can sell for around $1,000 to $1,500 (with a wider range possible depending upon the location and other details), Plum Creek sold recreation lands for over $4,000 per acre, and residential development lands for over $5,000 per acre. Factor in the fact that the company has identified 1.7 million acres as being available for "better purposes," and that adds up to a lot of potential value.
Despite the housing slowdown, companies like Pulte
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).