Here comes the downgrades for the sector CIBC World Markets analyst Hamir Patel expects record second-quarter results for forestry, building product and packaging stocks in his coverage universe.
However, he warns investor focus will remain largely on the decline in wood prices.
In a research report previewing earnings season in the sector, Mr. Patel reduced his Western spruce, pine, and fir (SPF) forecast for the second half of 2021 to $580 per thousand feet from $675. His southern yellow pine (SYP) estimate slid to $490/mfbm from $700.
“While wood product equities are likely to remain under pressure in the coming weeks until lumber/OSB prices find signs of a floor, valuations remain attractive and we expect these stocks could start to work again in the fall once the commodity pricing correction has played out,” he said. “Although a marked slowdown in DIY demand in recent weeks is concerning, the outlook for housing (including R&R) remains attractive over the next few years given tight new home supply, the rise in home equity levels and an ageing U.S. housing stock. In forestry/building products, our top pick remains West Fraser given its low-cost position and OSB exposure (better S/D fundamentals than lumber). Our other Outperformer wood/building names (by pecking order) include Hardwoods, Western FP, Stella-Jones, Doman, Interfor, Resolute and Canfor. This pecking order reflects a preference for specialty producers in a correcting commodity market and the cost headwinds facing Canfor in H2 given its heavier weighting to the B.C. Interior [NA’s high-cost lumber region (14 per cent of output)].
“On the paper and packaging side, we continue to favor Intertape given strong e-commerce/housing tailwinds (collectively 37 per cent of its end markets) and attractive valuation. Our other Outperformer names here include Cascades (containerboard pricing momentum), CCL (high quality with significant M&A potential when targets become more accessible for due diligence), and Mercer (attractive growth pipeline). We remain on the sidelines on Winpak given limited catalysts and resin inflation.”
With the changes to his price deck, Mr. Patel made a series of target price adjustments to stocks in the sector, including:
- Canfor Corp. ( “outperformer”) to $32 from $41. The average target on the Street is $43.33.
- Canfor Pulp Products Inc. ( “neutral”) to $9 from $11. Average: $11.50.
- Cascades Inc. ( “outperformer”) to $20 from $17. Average: $19.57.
- Conifex Timber Inc. ( “neutral”) to $2.50 from $3.25. Average: $3.70.
- Doman Building Materials Group Ltd. (DBM, “outperformer”) to $10 from $13. Average: $13.07.
- Interfor Corp. ( “outperformer”) to $40 from $54. Average: $49.42.
- Mercer International Inc. (MERC-Q, “outperformer”) to US$16 from US$19, Average: US$20.10.
- Stella-Jones Inc. (SJ, “outperformer”) to $56 from $60. Average: $59.38.
- West Fraser Timber Co. Ltd. ( “outperformer”) to $118 from $141. Average: $143.63.
- Western Forest Products Inc. ( “outperformer”) to $2.60 from $2.90. Average: $2.88.
- Winpak Ltd. ( “neutral”) to $42 from $46. Average: $49.50.