I've said it once before, but it bears repeating -- the lumber and paper products industry is a very tough place to make a living, either as an operator or as an investor. And while there are certain segments and companies that do interest me as potential investments, Pope & Talbot (NYSE:POP) isn't one of them.
For those who don't follow the space much, Pope & Talbot is primarily a producer of pulp and softwood lumber, with about three-quarters of its operations in Canada. And that's certainly part of my problem here. I'm not a huge fan of pulp in general and certainly not a fan of any pulp companies not based out of South America (like Aracruz (NYSE:ARA) or VotorantimCelulose (NYSE:VCP)). And lumber? Well, let's just say that a lot of that softwood lumber finds its way into housing applications. Get the picture?
This is a company that's definitely struggling. Revenue was up more than 7% this quarter, but the company reversed a year-ago operating profit to a loss and reported a drop in EBITDA of about 75%. Debt outnumbers equity by about three to one, and this quarter's performance doesn't come close to clearing the interest charges, let alone leave anything for shareholders. In fact, this company recently got the dreaded "going concern"* -- though that might be a bit more alarmist than is really deserved.
Is there any good news here? Yes, but just a little.
First, the pulp market seems pretty firm in terms of pricing. Second, the governments of the United States and Canada recently came to an agreement on timber duties that should result in Pope & Talbot getting more than $100 million back in withheld duties -- an amount that will cut outstanding debt by close to one-third, but won't necessarily come quickly.
Nevertheless, this is a company in a precarious position, and that makes the stock seem very binary to me -- the company is either going to restructure and recover or go away. Frankly, that's just a little more risk than I really want right now. For now, my interests are more with the newsprint and containerboard companies like UPM-Kymmene (NYSE:UPM) and Smurfit-Stone (NASDAQ:SSCC) and some of their peers.
*A going concern warning is added to financial statements when the auditor believes that the company may not have sufficient resources to continue operating. In plain(er) English, that means there is a meaningfully higher than normal risk of bankruptcy.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
