Deltic Timber riding all-time highs despite declines in lumber prices

Deltic Timber (DEL) reported earnings earlier this week that were severely down year-over-year. DEL, a $844M market cap company based in Arkansas, blamed a depressed housing and construction market that has forced timber prices lower.

Here is the related commentary from the press release:

“Lumber prices in 2010 [benefited] from a supply-side driven price increase primarily caused by a sawmill log supply shortage due to inclement weather in the southeast portion of the U.S…

…[There are] continued depressed economic conditions for the forest and building products and residential and commercial real estate development businesses. We remained profitable even with persistent record-low prices for pine sawtimber, lack of the usual spring building-season benefit to lumber prices, continuation of a depressed residential real estate market, and absence of a commercial acreage real estate sale.”

The average sales price for pine sawtimber remained level at $26/ton with last year’s first quarter. Pine pulpwood plummeted over this same period by 50% to $8/ton. Average lumber sales price fell 14% over this period to $266 per thousand board feet. No forecasts were provided for future prices.

One of the few areas of the economy the Federal Reserve has failed to inflate continues to be mired in recession-like conditions. Thus motivating the Fed to continue to be accomodative in its monetary policy. On the other hand, these depressed conditions have not prevented Deltic’s stock from performing well. Stocks have, of course, well-benefited from the Fed’s printing of money. Corporate profits are now at all-time highs and DEL expects to turn in good profit performance going forward.

Despite poor market conditions, Deltic Timber's stock is at all-time highs

Despite poor market conditions, Deltic Timber's stock is at all-time highs

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Inflation may loom as material costs pressure earnings

In “Business Earnings Climb Despite Rising Costs“, the WSJ reports that companies reporting third quarter results are starting to sing a common refrain: material costs are rising fast and threaten to pressure profits. Soon, these pressures could translate into inflation at the consumer level…just as the Federal Reserve is rolling out a second phase of quantitative easing to fight the exact opposite force of deflation.

The article cites inflationary (or stagflationary) examples from paper and packaging makers, apparel manufacturers, tire companies, and office supply distributors.

Avery Dennison Corporation is experiencing particularly acute problems with higher material costs:

“Label maker Avery Dennison Corp. is battling higher raw material costs with price hikes, but is still losing ground. CFO Mitchell Butier said while the company keeps adding more price increases to fight rising raw materials, it continues ‘to be behind that curve.’ The company announced a ‘mid to high single-digit’ price increase in North America, Chief Executive Dean Scarborough said. ‘Pretty substantial…but we need it. Our margins are really taking a hit,’ he added.”


DuPont benefits from pricing power

E.I. DuPont de Nemours & Co, or DuPont, (DD) reported strong earnings results on Tuesday. DuPont generated $7B in revenue, a 17% year-over-year increase for the third quarter.

DuPont has six business segments. Each one generated year-over-year revenue growth in the third quarter. Four of the six experienced positive pricing power: Electronics & Communications, Performance Chemicals, Performance Coatings, and Performance Materials. Only Safety & Protection experienced downward pricing pressure (hurting net sales gains by 1 percentage point), and Agriculture & Nutrition was (surprisingly) flat.

Pricing power was strong even in the U.S. The U.S. generated 31% of DuPont’s revenues for the quarter, 5 percentage points of the 17% increase in sales came from pricing.

As a result, DuPont is bullish about its outlook and expects its positive pricing power to continue (emphasis mine):

“The company expects full-year earnings to be about $3.10 per share, excluding significant items which will include a fourth quarter $.13 per share loss on the early extinguishment of debt. The previous guidance range was $2.90 to $3.05 per share. The increased outlook reflects strong third quarter results and expectations for sustained demand in key global markets, continued pricing momentum and benefits from ongoing productivity.”