Amid persistent supply chain problems that has ravaged many industrial firms, it might be worth considering investing in companies such as NFI Group Inc. and Cascades Inc. once there’s visibility on when those manufacturing issues could start easing, according to a Bay Street money manager.
“Everything is going wrong at the moment, [but] looking at these two similar businesses just in terms of making things in a North American context, you can't see out far enough. So we still think there's an opportunity to pick up these high-quality companies, but just not right now,” said Bill Harris, partner and portfolio manager at Avenue Investment Management, in an interview on Monday.
Global supply chains have been hampered by widespread labour shortages and renewed lockdowns in key manufacturing areas such as China, leading some firms to scale back their sales forecasts. Most companies are also grappling with the rising cost of doing business amid soaring inflation rates and higher oil prices.
In April, bus manufacturer NFI cut its revenue outlook for a second time in less than a year because of a shortage of microprocessors. The company is working with alternative suppliers but vehicle deliveries are still expected to be lower than expected. Over the past 12 months, NFI’s stock has been nearly cut in half.
Similarly, plastics and tissue maker Cascades reported a surprise adjusted loss in its latest quarter as it faced higher materials and transportation costs, triggering a number of analyst downgrades. Its stock has dropped roughly 25 per cent over the past 12 months and trades at a three-year low.
“It's very tough environment for these businesses,” Harris said.
“[NFI] should be, in theory, a very stable company. It's not so much that they can't pass on [higher] prices. Right now, they can't even build anything. It's extraordinary -- just the glue up in supply chains and you're missing one or two parts means you just can't make the bus.”
He added that after more than two years of dealing with the pandemic, it’s still hard to gauge the path to recovery for industrial companies and their supply chains.
Harris noted that he believes Cascades “on a really good day should be a $20 stock”, which is roughly twice as what it’s currently trading at.
For investors that are watching these types of companies, he suggests waiting for signs for when their outlook will improve.
“It's now the perfect storm, and you can't see a way out of it at the moment. We’re still going to follow it closely because there might be an opportunity to pick those sort of more industrial businesses up at really good prices. But right now there's no way to see how that's going to recover anytime soon,” he said.