One of the more obscure asset classes got a big boost a number of years ago when the big institutional investors, particularly the ivy league endowment funds, started to emphasize it more, and when studies kept flowing about how this class has been one of the more perfect “diversifiers” for a portfolio: steady returns, not correlated with the stock market, from a renewable asset that has long outpaced inflation.
But we haven’t mentioned it lately in these pages, so when Nicholas Vardy started touting a pick in this sector over the weekend I thought it was high time to have a quick gander.
The asset class, in case you were waiting with bated breath, is timberland. Not the boots, but the actual forests. Timber has some great qualities for investors: it serves international markets, it grows without heavy input costs, it can be harvested whenever you feel like it and left to grow in value if prices are too low to harvest profitably, and pricing and demand have pretty steadily increased for most of the last century. You don’t get rich from owning a wood lot, but you can make a very steady return for a very long time if you manage it properly.
So that’s the basic backdrop — but of course, if Nicholas Vardy is going to get us to subscribe to his newsletter he has to promise something a bit more exciting … here’s how he puts it:
“After July 25th, owners of this stock will be saying: ‘Yes, money does grow on trees!’
“Get in before quarterly earnings are announced for lightning-fast profits – plus long-term gains that history proves are all but GUARANTEED ….
“Legendary investor Jeremy Grantham calls it the only low-risk, high-return asset there is.
“I’m talking about timber. Yeah, trees.
“Grantham isn’t alone in his enthusiasm for timber. Top university endowments, pension funds and even newfangled ‘Timber Investment Management Organizations’ have plowed some $40 billion into timberland. The Harvard Endowment Fund has about a 9% weighting in timber.
“And right now, one U.S. timber stock is poised for takeoff as it approaches its 3rd-quarter earnings announcement on July 25, 2011. Better yet, this stock may be one of the last great ‘buy and hold’ values around.”
The big picture that Vardy paints is of Asia demand, with China’s steady timber appetite and the rebuilding in Japan as key drivers.
And, of course, it’s not just that you should buy timber, it’s that Vardy is recommending a “sure-fire timber play” to his Bull Market Alert subscribers — and, of course, he thinks you should subscribe (for $995) so you can learn what it is.
Here’s how he puts it in our final little nibble of clues:
“Don’t miss this sure-fire timber play my subscribers are getting
“My favorite way to play timber is one of the biggest players in the U.S. timber sector – owning, leasing or managing millions of acres of timberland and real estate in America. Plus, it has hugely valuable joint ventures and timber-management deals abroad.
“Last quarter, this company reported hefty net income gains, and a more than 20% improvement in its cash situation. I expect even better results from its Q3 announcement on July 25th, particularly in light of Japan’s rebuilding efforts – from which this company is already a key U.S. beneficiary.”
So who is it?
Well, unfortunately all three of the major US “pure play” timber companies — that would be Weyerhauser (WY), Rayonier (RYN) and Plum Creek Timer (PCL) — report on July 25, so that doesn’t let us narrow anything down very much.
Can we narrow it down further? Well, if we assume that when Vardy is talking about income growth he means year over year income, which is the metric usually used, then Plum Creek Timber has to be cut from the pack … they lost money last quarter. That also means we can disqualify Deltic Timber (DEL), a smaller company in the trees biz that also reported a losing quarter and reports next on July 25. And, of course, some of the timber companies that reported really strong growth, like Pope Resources (POPE) don’t report on July 25 (they’re on August 4, in case you’re keeping track).
And how about that “Q3” clue — does one of these companies have a fiscal year that doesn’t match the calendar year? (Most companies would be releasing their second quarter in July, not their third). Nope. So either it’s not really one of the big US timber companies, or that’s a mistake — I’m guessing it’s a simple mistake. Even the smaller companies like Deltic or Potlatch (PCH) keep to the standard calendar quarters.
Finally, we get the “hefty” net income gains and a 20% improvement in the “cash situation.”
Which doesn’t really match anyone, at least not so far as the mighty Thinkolator chugs through the data — as far as your friendly neighborhood Gumshoe can tell, none of the major US timber companies increased their cash on the books by 20% in the first quarter, either sequentially (ie, 20% from the previous quarter) or year over year.
So I’m going to have to stretch a bit and do some guessing. For earnings gains, I’m going to assume that the 2% that RYN tacked up for the first quarter doesn’t count as “hefty,” and PCL’s earnings dropped, and PCH, though they had an earnings spike in the first quarter, probably isn’t big enough to qualify as a “major” and isn’t in the sweet spot for export to Japan.
What is that sweet spot? The Pacific Northwest, the best tree growing environment in the United States and the best place from which to export logs to Japan and China. So that tells me that for this particular tease, I think we must be looking at … Weyerhauser (WY), which has the most exposure to the northern Pacific timber business of the major players, and whose exports went overwhelmingly to Japan even before the earthquake.
Weyerhauser converted to a REIT just last Fall, so their businesses are quite similar to Rayonier’s, which is a timer REIT that I own personally — they have a specialty fiber business (absorbent cellulose for diapers, etc.), a real estate business to find higher and better uses (HBU) for their huge land holdings, a timberland business managing the land and selling logs, and a timber products business turning some of that timber into end products (as in, boards).
Despite the fact that your friendly neighborhood Gumshoe is now living in a fairly timber-focused corner of the world, with our share of giant log trucks trundling through from the Berkshires, I know very little about the business — I do know that Rayonier carries a lot less debt than most timber REITs and has been a fine holding for me for a very long time, another example of a selling philosophy that might best be described as “if it ain’t broke, and it’s paying dividends, just ignore it and let it compound.” Weyerhauser is also the biggest of these companies, even after selling off their paper business to do the REIT conversion last year (market cap of about $11 billion, PCL and RYN are each about half that size).
Of those three major companies, all of whom have land scattered around the country, Plum Creek’s weakness is probably their relatively lower yielding timberland in the Rocky Mountains and the Midwest — other than the ideal growing conditions in Washington State and Oregon, the Southeastern US is where much of the money’s being made (per acre, at least) on timber. Rayonier and Weyerhauser both get much better returns in the South than you can in the colder areas where a lot of Plum Creek’s timber grows (the trees grow faster in Florida, Georgia, Alabama and Mississippi, naturally, than they do in Michigan and Montana), so Rayonier would still get the edge for me over Plum Creek … but Weyerhauser’s Washington State lands and their huge productivity and export potential to Japan and China probably do make them stand out as a stronger exporter who might be able to meet spikes in demand.
The down side in timber is readily apparent too, however — especially for the last five years or so. That’s because for the US timber REITs, the downside has mostly been residential housing, which is the major market for most boards produced in these firms’ sawmills… and you might have heard that there’s been a little, well, softness in the housing business of late. Sure, they can leave wood to grow for a couple years if the prices are soft, and if demand for new housing is just not getting the demand for wood back to “normal,” but if you’re a public company you’re going to feel a compulsion to make sales, generate revenue, and not just tell your investors that you’re waiting for a better price — one reason why there’s lots of managed timberland held by institutions, pension funds and the like, who might be able to focus more on long-term performance without individual investors clamoring for dividends.
There is also, believe it or not, a timber ETF, Guggenheim Timber (CUT) — it holds many of those names above as well as some foreign-listed companies that operate primarily in other countries, and carries a decent PE ratio (about 12) and yield (about 2.5% — a bit less than most of the timber REITs, but more than many of the timber and paper companies that aren’t REITs).
So there you have it — an asset class that probably most of us should have in our portfolios (I know I do), but also one that’s not the “secret” to individual investors that it might have been even ten years ago, so the valuations are not exactly hugely compelling on a current yield basis … no one drools at the notion of a REIT that yields 3%, I’m afraid. If you just want exposure to the timber sector and the generally steady growth of timber as an inflation-fighting asset class that doesn’t necessarily react to the market’s ups and downs, then it’s hard to argue against looking at the ETF if you’re making an asset class bet instead of a specific company “relative value” bet as Vardy appears to be doing with (remember, I’m guessing on this one) Weyerhauser.
Oh, and I don’t know about what the numbers will look like for any of these companies when they report on July 25th — but in the big picture, the second quarter tends to be the weakest for these companies, due largely to wet conditions that hamper harvesting in a lot of US timberland in the Spring. Generally lightning is a bad thing for timber and it isn’t necessarily known for “lightning-fast profits” as Vardy teases — one’s probably best advised to look at the asset class for its long term benefit to a portfolio rather than the quick strike of an earnings beat. But you never know … and Weyerhauser’s still relatively new corporate conversion and reorganization could certainly bring a surprise.
Full disclosure: as of this writing I own shares of Rayonier. I do not own any other company mentioned above and will not trade in any stock mentioned for at least three days.