Something's been bugging me about timber REIT Plum Creek Timber (NYSE:PCL) ever since fellow Fool Bill Mann first wrote about it in "A Tale of Timber and Love" back in May 2004.
Back then, Bill mentioned that the market was valuing Plum Creek's assets at less than $1,000 per acre. The assets in question are Plum Creek's 8.1 million acres of timberland. The "value" referred to is the company's enterprise value (its $6.6 billion market capitalization minus its $350 million in cash and plus its $1.8 billion in long-term debt).
If you're a lover of fireplaces and free firewood like me (and with snow softly falling outside, I imagine a few of you are), then perhaps just the mention of being able to buy land for under a grand an acre -- and not just land, but land with firewood a-growin' all over it -- would have perked your ears up. It certainly did mine.
And so I did some digging into Plum Creek's numbers. And indeed it did seem that the market values the company at about $1,000 per acre. How can that be? I mean, have you seen the prices that Home Depot (NYSE:HD) charges for a linear foot of red oak? Either the retail giant is milking consumers for an enormous profit, or the timber growing on Plum Creek's land is worth way more than the market gives credit.
So I did more digging, Googling my way to a handful of references citing your average standing red oak as worth about $500. And I got to thinking: If Plum Creek has more than three trees growing on an acre, it's a bargain!
Finally, came the news in December that Plum Creek had bought 48,500 acres of prime Maine timberland for an undisclosed sum. "Aha!" thought I. Once the company discloses the sum, we'll know how much Plum Creek thinks an acre of woodland is really worth -- and being a timber company, it should know.
The denouement came with Plum Creek's earnings release yesterday (what's that? Oh, it nearly doubled its 2003 earnings. Big whoop.) Plum Creek anted up $33 million for the Maine acreage: That's about $680 an acre. So did Plum Creek get itself a super sweet deal up north, or is timberland really worth less than the timber upon it?
To be honest, I'm still not sure. I'm still trying to wrap my Foolish mind around this conundrum. In the meantime, though, I came across this interesting bit of trivia. Each of the past two years, Plum Creek has sold an average of about $680 million worth of timber off of its 8.1 million acres. That means that in 8.1 years, Plum Creek should have harvested an amount equivalent to what it paid for the Maine acreage. But because the company practices sustainable forestry, the land is just as timber-rich at the end of the 8.1 years as it was at the beginning.
Fool contributor Rich Smith owns no shares of any company mentioned in this article.
