The notion that two of the Inland Northwest’s publicly-traded companies, one that manufactures wood products and the other that makes paper products, would see a surge in demand during a pandemic may once have seemed hard to fathom.

But for Spokane-based companies PotlatchDeltic Corp. and Clearwater Paper Corp., what has been an angst-ridden year for many businesses has created unprecedented demand for their products—primarily lumber from PotlatchDeltic and toilet paper from Clearwater.

And because of it, both companies have been able to use 2020 to position themselves for strong financial futures, says Colin Bowen, a senior equity analyst who tracks the performance of the eight public companies based in the Spokane-Coeur d’Alene area.

Bowen says both companies are riding an economic “tailwind” created by the pandemic.

Clearwater Paper posted third-quarter net income of $21.4 million, or $1.28 a diluted share, a stark contrast from a net loss of $11 million, or 66 cents a share, in the year-earlier quarter. For the first three quarters of this year, Clearwater brought in $54.5 million in earnings, compared with a $7.6 million loss in the year-earlier period.

For the 2020 third quarter, PotlatchDeltic reported net income of $81 million, or $1.20 a diluted share, compared to $20.6 million, or 30 cents a share, in the third quarter of 2019. For the first three quarters of the year, the company’s earnings are up 50% compared with the year-earlier period. 

In the third-quarter earnings report, PotlatchDeltic chairman and CEO Michael Covey is quoted as saying, “Our timberlands and wood products businesses achieved record financial performance as outstanding operational excellence by our employees capitalized on the historic run in lumber prices.”

In an interview with the Journal late last month, Eric Cremers, chief operating officer and president of PotlatchDeltic, says, “Nobody expected demand for lumber to go up like this.”

He adds, “Between new home starts and repair and interior remodeling, the entire industry was caught off guard by the dynamics of this year. It’s just been mind-blowing.”

Cremers will succeed Covey as the company’s CEO on Jan. 1. Covey will continue in his role as a director, serving as executive chairman of the board of directors.

PotlatchDeltic’s corporate headquarters is located in the Wells Fargo Bank building, at 601 W. First, in downtown Spokane. The company also has an operational base in El Dorado, Arkansas, with real estate offices, timberland, and wood products plants and offices in a total of seven states.

Hart Capital’s Bowen says PotlatchDeltic has demonstrated strong operational results in 2020.

As a real estate investment trust, PotlatchDeltic also pays a quarterly dividend to its shareholders. Bowen says the company has presented a “healthy total return to shareholders” of an 8.8% increase as PotlatchDeltic stock has appreciated starting from the beginning of the year to Thanksgiving, he says.

During the third quarter, the company posted a record adjusted earnings before interest, taxes, depreciation, and amortization of $135 million, up 146% from year-earlier quarter, according to Bowen. EBITDA is a measure of profitability that can be compared to the performances of other companies, he says.

“Additionally, on the most recent earnings call, management guided (PotlatchDeltic) to sequential EBITDA growth into Q4 despite lumber price declines,” says Bowen.

Though down from the August high of $930 per 1,000 board feet to November’s seasonal slowdown of $630 per 1,000 board feet, current lumber prices remain 50% above a typical November, Bowen says.

Historically low mortgage interest rates and a recent rise in families migrating to suburban from urban areas helped contribute to the demand for lumber for new housing. Moving forward, a strong housing future outlook and its recent cash flow all bode well for PotlatchDeltic, Bowen says.

While PotlatchDeltic benefitted from the circumstances created by the pandemic, Bowen says the public’s impulsive desire to stock up on toilet paper has helped the company reestablish a strong financial footing.

Though Clearwater Paper’s share price had been in a steady decline since early 2015, Bowen calls the company a pillar of the Spokane community.

“(Clearwater Paper) operates in a very mature and slow-growth industry, and in a market that puts such a high premium on growth, it can be difficult for the share price for these types of companies to appreciate,” Bowen says.

Though Clearwater Paper’s shareholder earnings have historically been volatile, the company in recent years made substantial strides in divesting itself of noncore assets and paying down previous high debt levels, he says.

Those moves, the spread of COVID-19 throughout the U.S., and panic toilet paper buying sparked by the pandemic helped to create a growth environment for the company, which, he says, was completely unexpected from his vantage point as an analyst.

“Dissimilar to the majority of local businesses, the pandemic has a offered a significant tailwind for the company through a confluence of demand strength in the tissue business,” he says.

Being a needs-based product, the tissue business is economically resilient with low input costs in pulp, according to Bowen.

“Financially speaking, the result has been a material expansion of the gross margin from a historical 10% to 11% run rate to 17.4% and 17.2% in the second and third quarter of this year,” Bowen says.

As a result, the company’s free cash flow over the last four quarters has swung from negative $216 million to a positive $207 million. Free cash flow is a measure of funds available to distribute to creditors and shareholders.

“As of Thanksgiving, year-to-date shares have appreciated by 67%, or, relatively speaking, an impressive 53% over the S&P 500’s total return,” Bowen says.

Though Hart Capital’s primary focus is on investment planning, portfolio management, and other client financial services, the company also tracks and markets what it calls the Hart Capital Inland Northwest Index & Composite. The index employs a tracking methodology similar to that of the Standard & Poor’s 500.

“Year to date, Clearwater Paper is the standout performer with an 81.1% gain,” Bowen says. 

Looking forward, as the economy reopens, consumption normalizes, and consumers de-stock pantries, Clearwater Paper’s growth may moderate, Bowen says. He adds, however, the company is a in a “materially more stable financial position” than before the pandemic.

Beyond the performance of the two publicly traded companies, Bowen says it’s been fascinating from his perspective to watch some sectors of the economy and some businesses flourish, while others have come to a standstill.

“You would think that those hyper-discretionary products, the high cost toys … boats, RVs, would be really under pressure,” he says. “But some of those companies have been the best-performing companies out there.”

The pandemic has revealed how disconnected business performance and stocks sometimes can be from the at-large economy.

“The people who are buying those products are less likely the ones to be effected by the pandemic,” he asserts. “That has surprised me the most.”