My paper on the Deltic Timber Corporation provides an overview of the company, and through using Porter`s 5 forces model, presenting the strategic analysis of both the company and its industry.
My paper on the Deltic Timber Corporation provides an overview of the company, and through using Porter`s 5 forces model, presenting the strategic analysis of both the company and its industry. The report also presents financial statements and ratios information through which we can understand its competitive performance in the industry. And I have analyzed earnings, historical stock price performance and I have valued the stock price based on DDM and FCF models. Based on my research and different analyses I have given final recommendations about the price ranges to buy, sell, or hold the stock.
- DELTIC TIMBER CORP. OVERVIEW
Deltic Timber Corporation (Deltic) is a natural resources company engaged primarily in the growing and harvesting of timber and the manufacture and marketing of lumber. Deltic owns approximately 445,800 acres of timberland, mainly in Arkansas and north Louisiana. The Company’s sawmill operations are located at Ola in central Arkansas (the Ola Mill) and at Waldo in south Arkansas (the Waldo Mill). In addition to its timber and lumber operations, the Company is engaged in real estate development in central Arkansas. The Company also holds a 50% interest in Del-Tin Fiber LLC (Del-Tin Fiber), a joint venture to manufacture and market medium density fiberboard (MDF). The Company is organized into four segments: Woodlands, Mills, Real Estate and Corporate. The Company’s principal products are timber, timberland, softwood lumber products (primarily finished lumber), residual wood products, hunting land leases, oil and gas lease rentals and royalties, and real estate.
- DELTIC TIMBER CORP.`STRATEGIC ANALYSIS
It becomes clear that the company` strategy is diversification because it engages primarily in manufacturing of lumber but it is organized in four segments. However, to reach to this strategy we can follow Porter`s 5 forces analysis.
- The threat of new entrants.
Deltic Timber Corp., operating in lumber industry, suffers very high competition. While the barriers to start up a lumber manufacturing corporation are not impossible to overcome, the threat of new entrants is big.
- Power of suppliers.
Historically, retailers have tried to exploit relationships with suppliers. In this business the suppliers do not have so high influence. Deltic timber Corp. has 480 acres of forest and it supplies its manufacturing on its own. Thus, it is not dependable on suppliers.
- Power of buyers.
Individually, customers have little bargaining power with it because the demand for wood is big. However, if customers demand high-quality products at bargain prices, it helps keep retailers honest.
- Availability of substitutes
There are many substitutes of wood. For example, we can use other non-wood materials. Viewed from another aspect wood can substitute the usage of fossil fuels and vice versa.
- Competitive Rivalry.
Deltic Timber Corp. main USA competitors are Louisiana-Pacific Corp., Weyerhaeuser Co., etc.
Deltic Timber Corp., like USA operating corporation - it can suffer stiff competition not only from other USA corporations in the wood industry, but also from Canadian corporations products encountered in the same industry, throughout their big exports to the USA. We can see such factors looking at the official website of U.S. Lumber Coalition (2012):
The U.S. softwood lumber industry is under severe strain from unfairly traded imports of lumber from Canada. Canadian lumber producers claim that any disadvantage for U.S. producers is due to inefficiency in the U.S. industry. But, the U.S. lumber industry is highly competitive and is rated among the most efficient lumber industries in the world.
So the competitive rivalry is high.
Finally, we can understand that for Deltic Timber Corp. the best strategy is diversification – operating in different segments gives it the opportunity for compensating the losses from one segment with revenues from others, and as a whole, to work in profit.
Moreover, something about Dletic` s current strategy we can see at the First Q-2012 Deltic Timber Profits Conference Call – Final (2012):
RAY DILLON ( President and Chief Executive Officer of Deltic): As we have said many times our strategy is to harvest the forest on a sustainable yield basis and do that consistently. We believe that's the appropriate approach to maintaining the forest and maximizing growth rates, and maintaining the overall health in the forest.
What about the opportunities for growth? We can know enough things looking again at the First Q-2012 Deltic Timber Profits Conference Call – Final (2012):
STEVE CHERCOVER (analyst, d.a. davidson & co): Perfect. Maybe just if I can get you to elaborate on that, are you -- we know that you're acquisitive. Are you seeing any opportunities for growth?
RAY DILLON (President and Chief Executive Officer of Deltic): Let's just call it no major opportunities. We participate in small opportunities when available, and certainly would be looking forward to participating in a larger opportunity but we don't see any of those on the horizon right this moment.
Thus, we have learned from this conference call that there are no major opportunities for growth.
- FINANCIAL ANALYSIS OF THE COMPANY AND ITS COMPETITIVE PERFORMANCE OF THE INDUSTRY.
Financial statement analysis is important for the evaluation of future company performance. Thus, in my paper, I take some tables from Form 10-K for Deltic as Balance sheet, Income, Cash flow and Retained Earnings statements (See Appendix 1,2,3 and 4) and based on the data I calculated some financial ratios (See appendix 5) to make some analysis.
This is a preview of the whole essay
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.
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.
Appendix 1: Balance Sheet
Appendix 2: Statement of Income
Appendix 3: Statement of cash flow
Appendix 4: Statement of Retained Earnings
Appendix 5: Calculations of Financial ratios (using the data above):
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
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;
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
INTRINSIC VALUE = 4.48
Bibliography Cited Literature
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CQ Transcriptions LLC. (2012, May 8). First Q-2012 Deltic Timber Profits Conference Call - Final.
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