Real estate slowdown could hack Plum Creek Timber

Posted by: Aaron Pressman on September 14, 2006

Homebuilding stocks have been crushed this year on the slowdown in the housing market. Whether they’re going down much further is an open question, with some well-known value investors arguing that the segment is already pricing in substantial bad news. I’d tend to disagree and look for further declines given the bubble conditions that have prevailed in mortgage lending and real estate prices for the past several years. But there’s another way to play the housing slowdown and that’s in timber prices. A Morgan Stanley research report this week noted that just the slow down in housing starts, that is a decline in the number of new homes being built, is likely to hurt lumber prices and within a year or two, the value of timber lands as well.

And there’s a pretty direct play on timber in Plum Creek Timber (Symbol: PCL), a company that reorganized in 1999 as a real estate investment trust which owns some 8 million acres of timber lands all over the United States. Morgan Stanley expects falling timber could trim at least $5 off Plum Creek’s share price, currently around $34. That makes it a decent shorting candidate. Other stocks that could be hit a bit less include MeadWestvaco (MWV), Weyerhaeuser (WY) and Temple-Inland (TIN), though Morgan Stanley rates only Plum Creek and MeadWest “underweight.”

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Reader Comments

David

September 29, 2006 03:50 PM

Dear Aaron,
What do you think about the impact of the housing slowdown on regional bank stocks? Some of these stocks have had a huge run-up, but are highly exposed to real estate and construction loans. One example is Bank of the Cascades (CACB) in Oregon, which is up 83% on the year, yet its in a market where the local real estate bubble has now totally collapsed (Central Oregon, where housing inventory is up 400% in the past year). It also seems out of wack to a comparable, Columbia River Bank (CBBO).Will regional banks get hit too?
Best regards,
David

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