Pope Resources: The Forgotten Timber Company

Nov. 5.07 | About: Pope Resources (POPEZ)

Unless you have being living under a rock for the last five months or so, you already know that the United States housing market is in a decline. On October 16th, homebuilder D.R. Horton (NYSE: DHI) reported that its quarterly net orders for new homes fell by 39%. This certainly doesn't predict good tidings for the rest of the builder sector, including St. Joe (NYSE: JOE), even after its recent "fire sale".

The market has really been taking the housing sector to proverbial woodshed. I'm not comfortable in calling a homebuilder bottom; I'll leave that to Warren Buffet. I am comfortable in finding long term bargains that have been thrown out with the housing bathwater. While investors have been flocking to gold, silver, corn and steel as ways to play emerging markets growth, lumber has gone almost unnoticed. The fate of the U.S. housing market weighs too heavily on the asset class. Anything associated with homes are taboo. For some reason it seems like people have the idea that we will never build houses again, or that timber doesn't play into global infrastructure expansion.

I think investors are missing out on a vital future growth story as well as, in the short term, pretty good income. Timber is gaining fast acceptance as valid asset class. Many professional money managers now see the importance of owning timberlands and lumber stocks as a way to diversify risk and hedge inflation. These same stocks can also provide a nice income cushion. Several of these companies are structured as REITS or limited partnerships. Many of these stocks pay above average dividends contrasted to the highest yielding gold stock, Gold Fields (NYSE: GFI), which only pays 1.5%. There is a timber ETF in the works from Claymore Securities. Until more is known about the fund and it has a trading history, I think investors should right now focus more on individual woodland stocks.

There is one in my mind that sticks out as a buy for the long haul; Pope Resources (NASDAQ: POPEZ). Pope Resources is often forgotten when dealing with lumber stocks. Investors tend to focus on the big three timber REITs of Plum Creek (NYSE: PCL), Rayonier (NYSE: RYN) and Potlatch (NYSE: PCH). While all three are great investments, I think that Pope makes sense as a better long term choice due to a few unique features. Located in the Northwest, Pope was created in 1985 as a spin off of Pope and Talbot's woodland assets and has over 150 years worth of operations. It directly owns 118,000 acres and controls 1.5 million acres via its subsidiaries. Pope also has under its umbrella a grouping of planned residential communities.

What makes Pope Resources an intriguing investment in the lumber space is that it is structured as a limited partnership. Timber, as a long life based asset class, benefits from limited partnership's tax efficient structure and estate planning features. The idea of owning forests for years, perhaps even generations plays directly into the nature of MLPs. While I can't offer tax advice or estate planning information, I will say that timber plus limited partnerships equal a match made in heaven for most investors and this is something I would certainly bring up with my tax/ financial advisor. Compared to the rest of the timber stock space, Pope has an industry low price to earnings ratio of 9.16. Plum Creek clocks in with a P/E of over 27. It also has a market cap right near 200 million and earned $4.54 per share last quarter. Pope also pays a market beating dividend of 3.9% and recently upped its quarterly payment by 43%.

I urge long term investors to take a deeper look at Pope Resources as an addition to their portfolios. It would make a perfect core timber holding or supplement to the big three REITs. Use limit orders on this one, however, to avoid over paying. There are only 4.5 million shares of POPEZ to go around, which could be a blessing if Wall Street finally catches on.

Disclosure: The Author has a long position in RYN