BAY STREET-Investors may find safety on a telephone pole

* Investors seen best off in specialized forestry firms

* Telephone-pole, railway-tie, and tissue makers cited

* Seen having measure of earnings protection

By Allan Dowd

VANCOUVER, British Columbia, June 7 (Reuters) - Investors searching for a hint of good news from the beleaguered Canadian forestry sector may want look at the telephone poles outside their houses or at a nearby railroad line.

The recession has battered sales of lumber for housing construction, but utilities still need to replace aging poles and railroads have to maintain their track - something both may do more of as government stimulus spending kicks in.

That's good news for Stella-Jones Inc (SJ.TO), which makes poles and railroad ties by treating wood it buys from sawmills. It has also produced something in short supply this year for Canadian companies linked to trees: A profit.

"I'm not going to say it's recession proof, but we don't get hit the same way," said Stella-Jones Chief Executive Brian McManus, who does not like to describe the company as being a forestry firm.

Stella-Jones, Sino-Forest Corp (TRE.TO), Fortress Paper (FTP.TO), and Cascades Inc (CAS.TO) are cited by analysts as examples of companies that offer at least a bit of earnings shelter from the current economic storm through their specialized products.

"Even in a recession we still blow our noses," said BMO Capital Markets analyst Stephen Atkinson about Cascades, which uses recycled paper fibers to produce tissue paper and packaging products.

Sino-Forest operates tree plantations in China, while Fortress produces security paper in Europe used to make banknotes. Both are Canadian corporations.

TRADITIONAL FIRMS STRUGGLE

Traditional forestry companies have been hit hard by the collapse of the U.S. housing market and the resulting global economic downturn.

Just last month West Fraser Timber Co (WFT.TO), North America's largest softwood lumber producer, slashed its quarterly dividend, citing weak lumber and pulp markets, which it does not expect to improve this year. [ID:nN29437092]

Canfor Corp (CFP.TO) said it would close three sawmills indefinitely and operate at just 50 percent of capacity.

A month before that, AbitibiBowater Inc, the largest North American newsprint maker, crumpled under its overwhelming debt load and filed for U.S. bankruptcy protection. [ID:nNLG481515]

For companies with more specialized products, the downturn has presented interesting opportunities as well as challenges.

Cascades' profit was boosted in the first quarter by falling raw material costs as global competition for recycled fiber slowed down. That drop more than offset falling sales volumes for its products, the company said.

For Stella-Jones, reduced housing demand has been a mixed blessing since the company depends on wood supplied by sawmills and loggers that have been hurt by the downturn.

McManus said that has meant that raw material costs might not have dropped as low as expected during the slowdown, but that loyalty to suppliers makes sure Stella-Jones gets what it needs when the economy rebounds and timber supplies tighten.

INFRASTRUCTURE AND INSTABILITY

Government efforts to stimulate the economy may also present specialized opportunities.

Fortress's chief executive said in April he did not know of a central bank in the world that was cutting the number of currency banknotes it produces.

Proposals to rebuild North America's rail lines and construct more alternative energy facilities such as wind farms will require more of Stella-Jones's products, according to Brian Pow of Acumen Capital Finance Partners.

"At the end of the day, they stand to benefit from the infrastructure roll-out," Pow said.

Sino-Forest is keeping a close eye on China's stimulus efforts and government efforts to resolve the country's chronic wood deficit.

Analysts caution, however, that even companies with product niches are not immune to the danger of the strengthening of the Canadian dollar CAD=CAD=D3, which climbed 9.3 percent against the U.S. dollar in May.

For Cascades, currency appreciation could eat away some of its gains from lower fiber costs, according to Dundee Securities analyst Richard Kelertas.

Kelertas also noted that a product niche alone is not enough to guarantee success. "If you don't run it well, it doesn't matter if you're the only producer," he said. (Reporting Allan Dowd, Editing by Jeffrey Hodgson and Peter Galloway)