Firstly, liquidity ratios measure a firm's ability to meet its current obligations. Working capital ratio for 2011 (3,618) is higher than this of 2010 (2,520), thus Deltic Timber Corp. is less able to borrow on short notice in 2011 than in 2010. Moreover, current ratio also provides an indication of the liquidity of the business by comparing the amount of current assets to current liabilities, which value we can see in the Appendix 5, too.
Secondly, profitability ratios measure management's ability to control expenses and to earn a return on the resources committed to the business. For example, Return on Investment ,which measures the income earned on the invested capital, shows us that the income earned is higher in 2011 that that of 2010. (with ROI(2011) = 0.0777 – higher than the ROI (2010) = 0.0361). Or Return on Equity which measures the income earned on the shareholder's investment in the business, shows us that the income earned on the stockholders investment in 2011 is less than that of 2010. (with ROE(2011) = 0.0117 less than the ROE (2010) = 0.0538).
Thirdly, leverage ratios measure the degree of protection of suppliers of long-term funds and can also aid in judging a firm's ability to raise additional debt and its capacity to pay its liabilities on time. If we see the total Debts to Assets ratios, we will understand that Deltic Timber Corp in 2010 and 2011 has the similar ability to absorb asset reductions arising from losses without jeopardizing the interest of creditors. (with almost similar ratios of Total Debt to Assets(2011) =0.3356 and Total debt to assets (2010) = 0.3299).
Fourthly, efficiency, activity or turnover ratios provide information about management's ability to control expenses and to earn a return on the resources committed to the business. For instance, if we look at the Cash Turnover ratio, we will see that the corporation utilizes its cash more effectively in 2010 than in 2011. (with Cash turnover (2011) = 31.0243 and Cash Turnover (2010) = 36.9676).
In addition, we can see a table of Deltic Timber Corp`s competitors and their performance at yahoofinance.com (2012):
So we can see that Deltic takes the bigger market cap. It also has relatively good revenue growth although it is less than these of Louisiana-Pacific Corp. and Weyerhaeuser Co. The gross profit margin of Deltic Timber Corp. is higher than its main competitors and industry, therefore, we see that it indicates sufficient volume and little purchasing or labor costs. We also observe 2.65M net income and earnings per share 0,21 which is another positive for the company.
Moreover, Haynes (1990) said in his analysis that “Nearly two-thirds of USA land, or 483 million acres, is classified as timberland”. Thus, Deltic Timber Corp. has a big percentage of it and its production will grow. In addition, the prices of gas are rising, so Deltic will earn more.
- VALUATION OF THE DISCOUNTED CASH FLOW (DDM AND FCF) AND COMPARABLES VALUATION
Today it is important for each investor to know the intrinsic value in order to know whether to purchase the stock or not to buy it. If the intrinsic value estimate exceeds the stock`s current market price, the stock should be purchased and vice versa.
To understand the intrinsic stock of the Deltic Timber Corp. we can use DDM, discounted FCF or other relative valuation techniques as price/earnings, price/cash flow and price/sales ratio.
Firstly, we can use DDM for valuing the price of a stock by using predicted dividends and discounting them back to present value [Intrinsic Value = D (2011) / (k-g)]
Secondly, we can use ValuePro.net website (2012) to take the calculated intrinsic value of DEL in a discounted free cash flow valuation model, which is 4.48 of Deltic Timber Corp. (see Appendix 6). Comparing it with the current market price of the stock – 60.98 for 07.01.2012 taken from yahoofinance.com, we can patiently purchase it (it is overvalued).
Thirdly, if we use relative valuation techniques, we can look at ycharts website (2012) where we will find P/E, P/B and P/S ratios for DEL and other competitive corporations:
The price to book value is a financial ratio used to compare a company's book value to its current market price. Thus, from the table above, we see that the peak was in March 2011 and the through in June 2009. It means that the market value was higher than the book value for the whole period, however, it was the highest in March 2011. After it, the trend was declining sharply. As a whole, the P/B ratio for DEL was significantly higher in its industry.
Additionally, the price to sales ratio (PS ratio) is most useful for comparing companies within a sector or industry because "normal" values for this ratio vary from industry to industry. We can observe P/S ratio again in the Ychart website (2012):
In general, low price to sales ratios, where for Deltic Timber Corp. is in June 2009 are more appealing because they suggest that a company is undervalued. But now it is not because its P/S ratio is 6.498 which almostly reach its maximum in March 2012 and it is also the highest with its competitors.
- ANALYSIS OF ANALYSTS' EARNINGS PROJECTIONS AND PROJECTED PERFORMANCE.
Future earnings estimates are arguably the most important input when attempting to value a firm. By placing estimates on the earnings of a firm for certain periods (quarterly, annually, etc), analysts can then use cashflow analysis to approximate a fair value for a company, which in turn will give a target share price for publicly traded companies.
To obtain the best information for Deltic Timber Corp. earnings projections and performance we can observe some of the things from the last Q4 2012 earnings conference call presented in the Report Linker website (2012):
Financial results for the first quarter of 2012 were net income of $100,000, $0.01 a share. These results were the same as recorded for the first quarter of 2011. Going through our operating segments in detail, the Woodlands segment reported operating income of $4.8 million, $100,000 increase from the first quarter of 2011… Oil and gas lease rental and royalty income for the first quarter of 2012 was $1.4 million, about $200,000 less than the same period a year ago due to the impact of decade-low prices for natural gas… Our Mills segment reported income of $1.6 million in the first quarter of 2012 compared to income of $700,000 in the first quarter of last year…
Consequently, the corporation maintains successfully the net income in 2012 from 2011. Of course, if we look in more detail, there are some differences in its operating segments. For example, the income increases in Woodlands segment but it decreases in its oil and gas one, etc.
- HISTORICAL STOCK PRICE PERFORMANCE ANALYSIS AND PROJECTED PERFORMANCE.
To understand it better we can follow the movements in a graph of Deltic Timber Corp. performance together with the comparison with S&P 500 and the industry (Lumber and wood production), presented in the Morningstar website (2012):
Thus, the cyclical nature of Deltic’s operations is clearly reflected in the stock price. In 2005 it was 22.82, after that in 2008, the price of shares fell (-10.57) with decreased wood maker’s production and wood products spending. As the global economy began to rebuild itself in 2010, the increase in price shows DEL’s ability to reconstruct and increase their sales.
Moreover, the whole lumber & wood production showed cyclical performance with a sharp decline in 2008 (because it`s the year of the financial crisis).
- TECHNICAL ANALYSIS OF COMPANY STOCK PRICE.
Technical analysis involves the examination of past market data such as the prices and the volume of trading, which leads to an estimate of future price trends and , therefore, an investment decisions. To do it effectively, we can use Zacks website (2012) and present a graph and analysis of six different indicators:
We can see that the graph begins with a peak in 2007 but followed with a declining (bear) market in 2008 which finishes in a trough in February, 2009. There is also a declining trend channel during this period. Here comes the resistance level where is expected the increase in supply of the stock and a price reversal. After that there is an uptrend long-term trend. However, from 2010 until now a flat trend channel encounters. The Moving average line is moving similarly with the price. We can also see the high price in 2007 as increased on heavy volume relative to the stock`s normal trading volume.
- RECOMMENDATION
Based on my research I recommend investors who have not Deltic Timber Corp.` stock to buy or if they already have to hold it. There are several reasons to do it:
• The high correlation between timberland assets and inflation makes Deltic Timber an effective hedge against inflation;
• The Company has an excellent portfolio of high-quality diversified assets;
• The Company has reported positive annual financial results every year since 2002 and for 10 out of the last 11 quarters, despite the recession in the real estate development and lumber manufacturing industries;
• Deltic Timber’s substantial cash flows; strong balance sheet, evidenced by a very low debt-to-capital ratio; and the liquidity provided by its revolving credit facility give the Company the ability to withstand down cycles in its industry and to pursue attractive growth opportunities;
Moreover, the initial trading of Deltic`s stock was $18.50 (Corp. report ), now in 52-Week stock price trading range become $46.89 – $76.03. So, could you calculate how much you could earn, if you have this stock from the beginning? And the forecasted prices are higher, the security, too.
APPENDIXES
Appendix 1: Balance Sheet
Form 10-K
Appendix 2: Statement of Income
Form 10-K
Appendix 3: Statement of cash flow
Form 10-K
Appendix 4: Statement of Retained Earnings
Form 10-K
Appendix 5: Calculations of Financial ratios (using the data above):
Liquidity ratios:
Working Capital = Current Assets - Current Liabilities Working Capital (2011) = 16,328 – 12,71 = 3,618; Working Capital (2010) = 2,520
Current Ratio = Current assets / Current liabilities Current Ratio (2011) = 16,328/1,271 = 12.846 ; Current ratio (2010) = 1.16
Profitability ratios:
Net Profit Margin (Return on Sales) = Net income / Net sales Net profit margin (2011) = 2,659/121,847 = 0.0218; Net profit margin (2010) = 0.0875; Net profit margin (2009) = 0.0329;
Operating Income Margin = Operating income / Net sales Operating income margin(2011) = 7,459/121,847 = 0.0212; Operating income margin(2010)=0.1264; Operating income margin(2009)=0.0052;
Return on investment = Net Income / (Long-term Liabilities + Equity) ROI(2011)=2,659/341,87 = 0.0777; ROI (2010) = 0.0361;
Return on equity = Net Income / Equity ROE(2011)=2,659/227,123 = 0.0117; ROE (2010) = 0.0538;
Financial Leverage ratios:
Total Debts to Assets = Total Liabilities / Total Assets Total Debt to Assets(2011) = 114,747/341,87=0.3356; Total debt to assets (20010) = 0.3299;
Efficiency ratios:
Cash Turnover =Net sales/ cash Cash turnover (2011) = 121,847/3,291 = 31.0243; Cash Turnover (2010) = 36.9676;
(made by myself)
Appendix 6: The data for the calculation of DEL intrinsic stock
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INTRINSIC VALUE = 4.48
ValuePro.net
Bibliography Cited Literature
About the U.S. Lumber Industry. (n.d.). In US Lumber Coalition. Retrieved 2012, from
CQ Transcriptions LLC. (2012, May 8). First Q-2012 Deltic Timber Profits Conference Call - Final.
Deltic Timber Corp. (2012). In YChart. Retrieved 2012, from ,
Deltic Timber Corp. (n.d.). In MorningStar. Retrieved 2012, from http://performance.morningstar.com/stock/performance-return.action?t=DEL®ion=USA&culture=en-US
Haynes, R. (1990). An Analysis of the Timber Situation in the United States: 1989-2040. In fs.fed.us. Retrieved 2012, from
Used Literature
Deltic at a glance. (n.d.). In Deltic Timber Corporation. Retrieved 2012, from
Deltic - A Vertically Integrated Southern Pine Timberland Company. (n.d.). In Deltic Timber Corporation. Retrieved 2012, from