US Housing Rebound Will Lift Lumber And Renewable Demand

Key Takeaways

• Strong housing and demographic trends, plus new climate-driven markets, will fuel higher lumber demand and diversified, higher-margin revenues.
  
• Market undervalues premium land sales and capital optimization, setting stage for improved asset value realization and increased shareholder returns.
  
• Reliance on a cyclical housing market, geographic concentration, and regulatory changes expose PotlatchDeltic to prolonged earnings volatility and challenges to long-term growth.

Catalysts

PotlatchDeltic Corporation (Nasdaq: PCH) is a leading Real Estate Investment Trust (REIT) with ownership of 2.1 million acres of timberlands in Alabama, Arkansas, Georgia, Idaho, Louisiana, Mississippi and South Carolina.

• The persistent U.S. housing shortage, demographic tailwinds for millennial household formation, and an aging housing stock are expected to drive a sustained rebound in residential construction and remodeling activity, supporting higher future lumber demand and revenue growth for PotlatchDeltic.
  
• Heightened environmental focus and expanding opportunities in solar, carbon offsets, lithium, and other natural climate solutions are creating new, high-margin revenue streams that diversify earnings and bolster long-term margin expansion.
  
• The market is not fully valuing the premium pricing achieved on land sales (e.g., conservation transactions and solar/lithium options), and the company's positioning to capitalize further on strong institutional demand for rural real assets translates to improved net asset value realization and potential meaningful earnings accretion.
  
• Recent operational headwinds, onetime costs, and inventory impairments in the Wood Products segment are expected to reverse as lumber prices recover due to higher Canadian import duties/tariffs, improved mill utilization, and cost efficiencies, driving a significant rebound in net margins and segment earnings.
  
• Accelerated capital allocation actions, including aggressive share repurchases at a substantial discount to NAV and continued portfolio optimization, position PotlatchDeltic for enhanced per-share earnings growth and return of capital to shareholders as macro and industry fundamentals improve.

PotlatchDeltic Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PotlatchDeltic's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 10.1% in 3 years time.
• Analysts expect earnings to reach $120.4 million (and earnings per share of $1.15) by about August 2028, up from $41.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.9x on those 2028 earnings, down from 80.1x today. This future PE is greater than the current PE for the US Specialized REITs industry at 29.1x.
• Analysts expect the number of shares outstanding to decline by 1.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.32%, as per the Simply Wall St company report.

PotlatchDeltic Future Earnings Per Share Growth

Risks

• PotlatchDeltic's heavy reliance on the cyclical North American housing market, combined with continued tepid demand in residential construction and repair/remodel segments due to high mortgage rates and economic uncertainty, poses a risk of prolonged revenue and EBITDDA volatility if macro headwinds persist or secular housing formation slows.
  
• Elevated timberland valuations and aggressive competition from institutional investors mean that new acquisitions are financially unattractive and asset sales, while accretive at current prices, could diminish future timber yields, potentially constraining long-term top-line growth and reducing future earnings power.
  
• Concentration of timberland in specific geographies (Pacific Northwest, South) exposes PotlatchDeltic to outsized risk from region-specific challenges, including wildfires, pests, adverse weather, and regulatory changes, all of which could drive higher operating costs and erode net margins.
  
• Advances in engineered lumber substitutes, alternative construction materials, and potential long-term structural declines in traditional single-family homebuilding due to urbanization, may gradually erode demand for core wood products, putting downward pressure on revenues over the long term.
  
• Increasing regulatory pressure tied to sustainability initiatives (e.g., earlier sunsets for renewable energy tax credits, stricter environmental rules) could drive higher compliance costs or limit the growth and monetization potential of natural climate solutions businesses, negatively impacting earnings diversification efforts.

Valuation

• The analysts have a consensus price target of $50.625 for PotlatchDeltic based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $120.4 million, and it would be trading on a PE ratio of 37.9x, assuming you use a discount rate of 7.3%.
• Given the current share price of $43.16, the analyst price target of $50.62 is 14.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.