Pope & Talbot Inc (POP) showed up on our screen over the weekend for the first time. We think the recent sell off in the stock could provide an opportunity for the short term. We are strongly considering taking position in the stock this morning.
Though we have not had time yet to do a strong due diligence, a quick read of the ratios and environment look mixed. Currently, the lumber business is taking it on the chin, due in large part to the slump in housing. Accordingly, the largest fundamental drag on POP's earnings has been the lumber business. The real shock was the pulp side of the business, since pulp demand and price have been strong.
We believe the CN strike, supply for the mills and planned maintenance shut down of mills are short term road bump, which should start to normalize in future quarters. This coupled with an inventory build has placed strains on the liquidity for the firm. However, it seems management is actively working with lenders and their inventory supplies to help cushion any potential liquidity crisis. Given the company's asset base and operating tenure, they should be able to work with the lenders.
Furthermore, management has alluded to taking “bold steps” to solve the liquidity issue. One analyst on the call suggested a share buy back, which is far-fetched given the present state of affairs. We think there could be a plant or division sale. Even further out on the curve would be a buy out of the firm, which is not likely, given the firm's high debt level.
Management has also indicated that they see another 12 month of “pain”. We agree. Given all the risk factor, why consider the stock? We believe the aggregate share price is below the value of the assets and we think that this will be the low point in terms of losses. The question at hand is if the company can weather the downturn and still bleed red for a while. Our answer is yes, given continued strong projections for pulp into 2008 and a reorganization of the firm's cost structure.
In the immediate future we are considering taking a small equity position and writing long dated puts. We would still like to see the stock pull back just a bit. If we do take a position in the stock, we would sell with any substantial return of 15%+. We are not sure the long term fundamentals for the industry look great.
POP 1-yr chart: