Timber

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Money does not grow on trees. Unless, that is, you are in the timber business. Plum Creek Timber, the US’s largest private landowner and one of only three timber real estate investment trusts, on Monday reported earnings per share for the third quarter 18 per cent above the previous year. But the Reit’s shares, which rose 20 per cent this year to a record high in mid-September, have since reversed sharply, shedding more than two-fifths of their value.

Timberland values, rising from about $1,100 to more than $1,700 an acre in the past seven years, have helped support share prices in spite of weak demand for logs thanks to the housing slump. But Plum Creek, with 8m acres across 18 states, can call off the lumberjacks. Similar to petroleum producers, timber companies reduce output when pricing dips. But unlike the black stuff, trees continue to grow, adding about 5 to 7 per cent a year in value. With southern sawlog prices down 18 per cent year on year this quarter, for example, Plum Creek reduced its harvest by 13 per cent.

Meanwhile, the reduction in activity at lumber mills means less residue for paper makers, boosting demand in Plum Creek’s (admittedly lower margin) pulpwood business. Investors fear that a slowing economy will dent demand there also. There are worries, too, that land values may have peaked and the credit crisis could hamper land sales, and therefore cash flow.

The latter looks overblown. Plum Creek did temper its outlook for real estate sales – which for the first three quarters of the year only accounted for about a fifth of revenues – and has in the past cut its generous dividend. But the company has been paying down debt and continues to buy back shares, now trading at about half net asset value, arguing that this is a cheap way to increase its holdings of timberland. Investors, too, should consider a stroll in the woods.

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