RBC Ahead of third-quarter earnings season for paper, packaging and forest products companies, RBC Dominion Securities analyst Paul Quinn sees strong demand offsetting rising input costs.
“Despite some fairly material corrections, OSB and lumber pricing still remain at historically high levels. In other forest product commodities, the supply and demand balance remains tight, although we are starting to see slowing growth rates,” he said in a research report released before the bell on Wednesday.
“Regardless, paper & packaging producers have been able to leverage strong market conditions into higher pricing over the last 12 months. We expect that earnings will be strong for most companies given elevated capacity utilization and favorable pricing; however, input costs are becoming a larger factor. Costs for recovered paper, chemicals, and transportation will all likely be topical and could potentially cause variances versus consensus estimates.”
Mr. Quinn thinks tissue producers are “best-positioned” heading into earnings season, expecting a “much more upbeat” outlook based on the “favorable turnaround” in pulp prices, which should lead to margin strength.
“Recent commentary from P&G and Costco suggests that consumer tissue demand is starting to pick up and may remain structurally above pre-pandemic levels due to increased focus on health and hygiene,” the analyst said. “With expectations low and stocks that have underperformed, we think that there is room for positive surprises.”
Conversely, Mr. Quinn called pulp his “least-preferred” commodity, seeing the market in a “precarious position with both demand and supply shocks possible in the near term” following a surge in price earlier this year.
“On the demand side, Chinese government mandated paper & board curtailments could materially reduce demand,” he said. “On the supply side, Bracell is currently ramping up production at its new mill in Brazil. While the start-up of Arauco’s new pulp line was delayed by 3–5 months, we expect that it will impact operating rates in 2022. UPM is still on track to start up its new mill in Uruguay in H2/22.”
Mr. Quinn also made a series of target price adjustments on Wednesday. For Canadian companies, his changes were:
- Doman Buiding Materials Group Ltd. ( “outperform”) to $10 from $11. Average: $10.50.
- Conifex Timber Inc. ( “outperform”) to $3 from $3.50. Average: $2.83.
- Interfor Corp. ( “outperform”) to $44 from $47. Average: $42.83.
- Western Forest Products Inc. (“outperform”) to $3 from $2.75. Average: $2.80.
“We raise our price targets for five companies (KP Tissue, Western Forest Products, James Hardie Industries, Clearwater Paper, and Weyerhaeuser) to reflect increasing commodity prices,” he said. “We lower our price targetsfor seven companies(Canfor Pulp Products, Doman Building Materials, Conifex Timber, Interfor, International Paper, Mercer, and WestRock) to reflect slower-than-expected earnings growth.”
“In Canada, our favorite names are Interfor, Western Forest, Canfor, and Cascades. In the United States, our favorite names are Louisiana-Pacific, West Fraser, James Hardie, and Weyerhaeuser.”