D.A. Davidson Goes Neutral On Potlatch As Shares Near Price Target

Potlatch Corporation PCH reported its 2Q16 results, with the adjusted EPS ahead of the estimate.

D.A. Davidson’s Steven Chercover downgraded the rating on the company from Buy to Hold, with a price target of $40.

2Q Results

Apart from the EPS beat, Potlatch reported GAAP net loss of $0.77, driven by an after-tax loss of $36.7 million on the Central Idaho land sale.

“While we thought there might be some upside in the Wood Products segment, thanks to a run-up in Lumber prices, a capital project at the Warren, AR sawmill crimped results by $3 million, and instead, upside was propelled primarily by the Resources segment,” Chercover mentioned.

Management expects 3Q16 to see normal seasonal ramp. The full-year estimates have been raised modestly following the 2Q beat and improving outlook or the Wood Products segment.

Capital Allocation

“In the quarter, PCH closed the $114 million Idaho land sale and used the proceeds to redeem $42.6 million of 5.9 percent revenue bonds due October 2026, which should reduce annual interest expense by $2.5 million,” according to the D.A. Davidson report.

Potlatch also announced a $65.7 million refinancing of its existing 6 percent debt to cut the interest rate in half. This is expected to lead to another $2 million reduction in the annual interest expense.

Following the share buybacks in 2Q, Chercover mentioned that 90 percent of the authorization was still outstanding, which is likely to be a near term priority for excess capital.

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