Waldo Sawmill Expansion And Renewable Projects Will Energize Timber Markets

Key Takeaways

• Increased sawlog and cedar prices, along with possible tariffs, are expected to boost revenue in Timberlands and Wood Products segments.
  
• Strong real estate demand and renewable energy initiatives promise future growth, bolstering the company's earnings potential.
  
• Economic and policy uncertainties, alongside regulatory bottlenecks and tariffs, could intensify competition and constrain PotlatchDeltic's revenues and profitability.

Catalysts

PotlatchDeltic Corporation (Nasdaq: PCH) is a leading Real Estate Investment Trust (REIT) that owns nearly 2.2 million acres of timberlands in Alabama, Arkansas, Georgia, Idaho, Louisiana, Mississippi and South Carolina.

• Increased sawlog prices in Idaho and higher cedar prices due to strong regional demand are expected to boost revenue in the Timberlands segment.
  
• The potential implementation of new tariffs on Canadian lumber and other imports could drive domestic lumber prices higher, positively impacting revenue in the Wood Products segment.
  
• The completion of the modernization and expansion project at the Waldo, Arkansas sawmill, achieving its targeted production metrics ahead of schedule, is anticipated to contribute approximately $25 million in incremental EBITDDA annually, enhancing earnings.
  
• Demand for rural real estate remains strong, leading to a notable premium to timberland value, which should drive revenue growth in the Real Estate segment.
  
• Expansion in solar and lithium initiatives, with an increased acreage under solar option contracts and potential for lithium development, could significantly boost future revenue and earnings as these projects are realized.

PotlatchDeltic Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PotlatchDeltic's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 10.4% in 3 years time.
• Analysts expect earnings to reach $118.9 million (and earnings per share of $1.1) by about May 2028, up from $48.0 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 38.6x on those 2028 earnings, down from 60.9x today. This future PE is greater than the current PE for the US Specialized REITs industry at 29.5x.
• Analysts expect the number of shares outstanding to decline by 1.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.97%, as per the Simply Wall St company report.

PotlatchDeltic Future Earnings Per Share Growth

Risks

• Economic and trade policy uncertainties could negatively impact lumber markets, potentially affecting revenue and earnings.
  
• High Canadian softwood lumber duty rates may influence market dynamics, leading to increased competition and impacting net margins.
  
• Macroeconomic conditions constraining the U.S. housing market, such as low buyer urgency and affordability challenges, could suppress demand and affect revenue.
  
• Regulatory bottlenecks in solar and other natural climate solutions may delay potential revenue from these initiatives, affecting future earnings.
  
• The potential implementation of Section 232 tariffs on lumber imports could alter lumber supply and pricing, impacting revenue and profitability.

Valuation

• The analysts have a consensus price target of $50.0 for PotlatchDeltic based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $55.0, and the most bearish reporting a price target of just $42.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $118.9 million, and it would be trading on a PE ratio of 38.6x, assuming you use a discount rate of 7.0%.
• Given the current share price of $37.16, the analyst price target of $50.0 is 25.7% 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.