CIBC CIBC World Markets analyst Hamir Patel now sees “limited catalysts on the horizon” for forestry, building products and packaging companies.
“Lumber/OSB prices have already reinflated from their summer lows (and are now close to levels we expect prices to average next year), lumber futures are correcting, and the housing backdrop (while likely to stay above 1.5 million for several years yet) is only likely get more cloudy as rising mortgage rates (now at 3.2 per cent) raise affordability concerns with home prices already at record highs,” he said.
“While household balance sheets certainly remain strong (which bodes well for R&R), and the threat of a ‘buyers strike’ is low until rates approach 4%, we struggle to see what could attract new investors to these names. At the same time, we see increasing risks of forestry companies making questionable capital allocation decisions (consider West Fraser’s recent purchase of a greenfield sawmill at record valuations).”
In a research report previewing earnings season, Mr. Patel said he’s “moving to the sidelines on four lumber names,” downgrading their shares:
* Interfor Corp. (IFP-T) to “neutral” from “outperformer” with a $35 target. Average: $42.83.
* West Fraser Timber Co. Ltd. (
WFG-T +0.85%increas) to “neutral” from “outperformer” with a $120 target. Average: $139.27 * Western Forest Products Inc. (
) to “neutral” from “outperformer” with a $2.50 target, down from $2.60. Average: $2.80.
* Resolute Forest Products Inc. (RFP-N,
) to “neutral” from “outperformer” with a US$15 target. Average: US$17.