Plum Creek Timber Company Inc.’s (PCL) third-quarter 2014 adjusted earnings came in at 32 cents per share, 2 cents above the Zacks Consensus Estimate. Including the after-tax gain from insurance recoveries related to the Montana MDF plant fire, the company’s earnings were 34 cents per share. Results benefited from growth in operating income of the timber resources segments.

However, third-quarter 2014 earnings per share fell from the prior-year quarter’s figure of 44 cents, primarily due to higher interest expenses. While total revenue of $375 million increased 2.5% year over year, it narrowly missed the Zacks Consensus Estimate of $377 million.

Plum Creek Timber Company Inc - Earnings Surprise | FindTheBest

Segment Performance in Q3

Operating income at the company’s Northern Resources segment moved up to $13 million in the reported quarter from $5 million recorded in the year-ago period. The wide difference is particularly due to a non-cash loss of $4 million from forest fires in the West in the prior year. Nevertheless, sawlog prices increased 9% while average hardwood pulpwood prices moved north about 7% year over year. Overall harvest volumes were mostly similar.

The Southern Resources segment posted an operating income of $35 million, up about 29.6% year over year with the Southern timberlands acquisition as a notable contributor to harvest volume and operating income. Though average sawlog prices remained unchanged, pulpwood prices advanced around 9% from the year-ago quarter level.

While the operating income at the Real Estate segment fell 46.0% year over year to $34 million, the Manufacturing segment recorded an operating income of $16 million, up 45.5% year over year, as a result of a $5 million pre-tax insurance recovery gain.

Leaving aside that gain, the Manufacturing segment results were essentially unchanged year over year as the benefit from improved pricing for lumber and plywood were dwarfed by reduced MDF demand.

Finally, the Energy and Natural Resource segment booked an operating income of $6 million, up 20% year over year.

Liquidity

Plum Creek ended third-quarter 2014 with $90 million in cash and cash equivalents, down from $107 million at the end of the prior quarter and $433 million at 2013-end. Total long-term debt stood at $2.4 billion, relatively unchanged from the prior-quarter end as well as year-end 2013.

Outlook

Plum Creek expects its full-year 2014 earnings per share in the range of $1.10 – $1.20, , not including any impacts from the second quarter MDF fire, compared to the prior range of $1.05 – $1.25 per share. The Zacks Consensus Estimate of $1.12 per share also falls within this guidance scale.

For fourth-quarter 2014, earnings are projected within 29–39 cents per share, and the Zacks Consensus Estimate of 34 cents falls within this range. Plum Creek expects its 2014 overall harvest levels to come in the 19.2 – 19.5 million ton range.

Plum Creek also announced a deal for selling around 165,000 acres of Montana and Washington forestland to The Nature Conservancy (TNC) for $134 million. This acquisition by The Nature Conservancy would take place in two stages – one would close in the fourth quarter, while the second would be accomplished by the end of first-quarter 2015.

Share Repurchase

During the third quarter, Plum Creek bought back $50 million worth of shares (around 1.2 million shares at an average price of $40.21 per share). At the end of the third quarter, the company had $125 million of authorization left under its current share repurchase program.

Our Viewpoint

We are encouraged with this earnings beat at Plum Creek and believe that the company’s Southern Timberland buyout from MeadWestvaco Corporation (MWV) will favor its long-term growth. But the tepid growth of the residential construction market, a decline in harvest volumes and anticipated slower growth in log prices raise our concern regarding this Zacks Rank #4 (Sell) stock.

We currently look forward to other REIT stocks that are scheduled to release third-quarter 2014 results this week. These include Boston Properties Inc. (BXP) and Equity Residential (EQR).

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