3 Stocks to Watch in Forestry Services

By Markets Fool.com

When it comes to using trees, paper is probably one of the first things that comes to mind. And since newspapers, books, and magazines are all slowly shifting toward digital, you might have some concerns about forestry-services stocks. But look around you a bit closer, and you'll see that trees are used for far more than just paper and there's still plenty of opportunity. Here are three forestry services stocks to watch: Weyerhaeuser Co. (NYSE: WY), Pope Resources A Delaware LP (NASDAQ: POPE), and, from a different angle,International Paper (NYSE: IP).

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A big REIT
Weyerhaeuser is one of the largest real estate investment trusts involved in the forestry industry. It owns roughly 7 million acres of timberland in the United States. From that land it harvests trees for sale, produces lumber, and makes fibers. It also manages around 14 million acres of timberland in Canada that supply additional wood for its U.S. operations, and it owns another 300 acres of timberland in Uruguay.

The old-school way to chop down a tree. Source: Public domain, via Wikimedia Commons.

Construction demand tends to be the driving force for Weyerhaeuser's top and bottom line. Log sales (approximately 20% of revenues) and lumber (50% or so) are both highly tied to this market. However, its fibers business (nearly 30% of revenues) provides a counterbalance, as demand for fiber products tends to be more stable. And while fibers are the backbone for making paper, roughly 80% of Weyerhaeuser's fiber sales are tied to absorbent materials (diapers and similar products), and 15% is used in packaging (milk cartons). So paper isn't such a big issue for this forestry-services company.

Small and unique
Pope Resources is a much smaller company, managing only around 190,000 acres of timberland in the Pacific Northwest. It's structured as a limited partnership, which is a complicating factor since it means investors will have to deal with a K1 form each year at tax time. However, there are two interesting angles here: 80,000 acres of the land that Pope manages are owned by private investment funds it runs, and in another section of its business, it develops housing around Seattle.

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So Pope harvests logs that get sold domestically and to Asia, an increasingly important business for the wood industry on the West Coast. The housing projects in development around Seattle, a vibrant West Coast market, are yet another revenue diversifier.However, forestry assets it manages for third-party investors are different. The fees this part of the business generates for the company provide an additional avenue of growth that leverages off other people's money.

While giants such as Weyerhaeuser are far more diversified geographically than Pope, have larger wood processing businesses, and either sell land to developers or have construction arms, Pope's asset-management arm is unique. That doesn't necessarily make Pope better or worse, but it shows that there's more that can be done with a forest than you might have realized.

A slightly more modern approach to cutting down a tree. Source: Daniels, Gene; via Wikimedia Commons.

In the food chain
So Weyerhaeuser represents the giants and Pope runs a similar log business on a tiny regional scale but has an interesting asset-management angle. But why does International Paper make this list of forestry-services companies? For starters, it owns over 300,000 acres of timberland in Brazil. But more so because the paper it makes, used mostly for packaging, comes directly out of wood processed by timberland owners.

International Paper is, then, a vital link in the wood food chain that isn't as reliant on the home building market. And the company takes you well beyond U.S. boarders, too. Although the United States accounts for roughly 70% of revenues, it has operations inLatin America, Europe, Russia, Asia, and North Africa.

But don't think International Paper isn't tied to the land. True, it isn't as large a player in the forestry services space directly as it once was, having sold most of its timberland roughly a decade ago to pay down debt. It still knows a great deal about what's needed to take care of timberland and, even though it's mostly a customer, it's well aware of its reliance on the health and prudent management of forests. So, it provides you with less-direct exposure to forest services, but at the same time keeps you in the space and allows you diversification away from the housing market.

More than paper
Trees and paper go hand in hand. But the industry touches so many more industries, including home construction, packaging, utility poles, and railroad ties ... and even asset-management services. Weyerhaeuser, Pope, and International Paper are three stocks worth watching in the forestry-services industry, not because they're the best options, though they may be for you, but because they show the diversity available to investors looking at the space -- if you take the time to dig a little deeper.

The article 3 Stocks to Watch in Forestry Services originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.