RBC Dominion Securities analyst Paul Quinn predicts the “weak earnings trend” for North American paper and forest products companies will likely continue in the near term
“We expect Q123 results to continue to the weak earnings trend established in Q422,” he said in a report released Monday. “Building material prices remain very low. Pulp prices have materially weakened over the last month, led by lower consumption in China and capacity adds. Paper prices appear to be holding, but operating rates are weak. Containerboard markets are sloppy with market-related downtime attempting to offset the new mill start-ups. Timber prices remain weak across North America due to weak lumber and other end use consumption. During the Q1 earnings season, we suspect investors will again focus on the macro, with the effects of a potential recession looming large across most commodities. While we wait for an inflection point in the economy, interest rates and overall confidence, we note that valuations remain near historic lows.”
Mr. Quinn made a series of target reductions “primarily reflecting challenging wood products markets and falling pulp price.”
“Unfortunately, we haven’t experienced a material pick-up in commodity prices quarter-over-quarter, but we do expect cost reductions in logs, stumpage, pulp and energy, which could be a positive in the quarter,” he said. “For the balance of the year, we favour lumber, tissue and timber companies. On the lumber side, we continue to anticipate further capacity closures in BC as producers are experiencing negative margins at present. The reduced sawmill capacity, together with a pick-up in home building activity, is setting up for a much improved pricing environment in 2024. Lower pulp costs will benefit tissue producers in 2023.”
“Lower pulp and containerboard pricing is expected to weigh on companies leveraged to these commodities in Q1. Given the level of economic uncertainty, it isn’t clear when pulp and containerboard prices will reach their bottom at this point.”
They include:
- Greenfirst Forest Products Inc. ( “sector perform”) to $1.50 from $1.75. Average: $1.50.
- Mercer Inrernational Inc. (“sector perform”) to US$8 from US$12. Average: US$11.70.
- Western Forest Products Inc. ( “sector perform”) to $1.25 from $1.50. Average: $1.46.
- West Fraser Timber Co. (“outperform”) to US$105 from US$110. Average: US$102.50.
Mr. Quinn added: “Favourite names: In Canada, we like IFP, CFP, CAS & DBM. In the US, we like LPX, CLW, SLVM, PCH & WY.”