Declining Stock and Solid Fundamentals: Is The Market Wrong About PotlatchDeltic Corporation (NASDAQ:PCH)?

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With its stock down 11% over the past three months, it is easy to disregard PotlatchDeltic (NASDAQ:PCH). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on PotlatchDeltic’s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

View our latest analysis for PotlatchDeltic

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for PotlatchDeltic is:

28% = US$424m ÷ US$1.5b (Based on the trailing twelve months to December 2021).

The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.28 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

A Side By Side comparison of PotlatchDeltic’s Earnings Growth And 28% ROE

To begin with, PotlatchDeltic has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 6.9% the company’s ROE is quite impressive. As a result, PotlatchDeltic’s exceptional 45% net income growth seen over the past five years, doesn’t come as a surprise.

As a next step, we compared PotlatchDeltic’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 10%.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. Is PotlatchDeltic fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is PotlatchDeltic Using Its Retained Earnings Effectively?

PotlatchDeltic has a very high three-year median payout ratio of 64%. This means that it has only 36% of its income left to reinvest into its business. However, it’s not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Regardless, this hasn’t hampered its ability to grow as we saw earlier.

Moreover, PotlatchDeltic is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 80% over the next three years.

Summary

Overall, we are quite pleased with PotlatchDeltic’s performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.