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Deltic timber -- decent assets but no earnings [ClearOnMoney]
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Deltic timber -- decent assets but no earnings

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Commentary

Deltic timber -- decent assets but no earnings

20 Dec 2012 by Jim Fickett.

I've written about the major forestry companies in the US elsewhere (The difficulty of investing in timber). This post is about a smaller player, Deltic Timber. Deltic, unlike the larger companies, has not gone the REIT route.

There are two possible views of Deltic that stand in sharp contrast. On the one hand, one can value Deltic on the basis of its assets. The enterprise value is about $950 million. The company owns 445 thousand acres of forest, and recent sales for timberland have been at about $1500/acre (Southern US timberland prices). So the forest alone is worth (very roughly, of course) $670 million. Since some of the land will be developed for commercial and residential uses, at much higher prices, and the company is also leasing some of its land for oil and gas drilling, it does not seem that the current valuation is particularly out of line. That's the asset view.

On the other hand, when one considers profits, the company seems wildly overvalued. Both net income and free cash flow have been quite variable:

Looking at the 12-year average, shown by the dashed lines in the graph above, the price-to-earnings ratio is 119, and the price-to-free-cash-flow ratio is 216. If the company has reasonable assets, why is it unable to produce reasonable income? This question is not directly addressed in the annual reports. There are some hints that current income is being sacrificed for future income. First, note that average free cash flow is quite a bit lower than average income. That suggests capital expenditures are higher than needed just for maintenance. Second, the company estimates that its inventory of usable standing timber is growing:

So perhaps there really is a decent value proposition here. The inventory is apparently growing at about 3% per year. If that is accurate, then there is a reasonable real return, just not realized until that inventory gets harvested in the future.

But. The inventory figures are based on surveys and various assumptions, about which no details are given, and software projections, about which no details are given. Cash flow, on the other hand, is measurable. So with no explanation of long-term strategy, and no analysis of future income, I do not see how one can justify an investment.

(All data in this post are from company reports and presentations on the Deltic website.)