RE:Buying opportunity soonGood point on cycle timing. I like the adage. Perhaps it applies to any commodity manufacturing or natural resource industry. Capital Cycle 101.
The questions are, how long will it take to turn, and how much cheaper will it get?
The former is a difficult question. If demand remains weak, there may need for further closures. It's a game theory problem, of how long marginal mill operators will stay open in hopes of a recovery. I've seen this in the shipping sector. So long as owners remain well capitalised and optimistic, they do not scrap ships. When they either run out of money (debt or equity) or lose confidence in the recovery, they recycle vessels, supply rations, and the market tightens for any upside demand shocks to boost freight rates and vessel prices. Similarly, if lumber demand doesn't rebound, it may take time for operators to close mills, e.g., in BC. Public operators are pretty well capitalised. I'm not sure about private ones. In a negative demand scenario maybe we need to go under 400 for a year or two for meaningful capacity reductions.
As for the latter question, equity sentiment could get worse, but valuations are already at very low levels, especially for Canfor, relative to history. Depending on how you value deposits, about USD 500-600 EV for 4-6bbf of capacity, depending on your inclusion rate for the high-cost capacity, which may be shuttered. $100/mbf is pretty low. Perhaps the lowest ever for this company or any of its peers. Downside momentum is out of the stock. We have seen the flood of selling, and the company is now buying back. Whether it gets meaningfully cheaper might depend on how much cash they burn and whether they are aggressive with capex or make an acquisition. In my view they should not do so, but I am not privy to board discussions. On the call they were guiding for a slowing rate of completion for existing projects. So I would guess they may not be aggressive. One place I will give them credit is that they haven't overpaid for assets, as far as I know, and have waited for low valuations. The negative flipside of the coin is hoarding cash and not returning capital, which is clearly why the market hates it, and rightly so.
As you pointed out, WFG and IFG have returned capital, and reduced share count, and consequently their stocks have handily outperformed CFP.
I had a look peer results. WFG is a better business, with the diversity of engineered products and better margins. The valuation is higher than CFP by a multiple. The discrepancy is almost unbelievable. As for IFP, they seem to be expanding aggressively through acquisitions and rebuilds, and aggressively returning capital. Despite the slightly lower cost structure of the other two, and more shareholder friendly governance, I prefer the strong balance sheet and lower valuation of CFP, especially in view of a possible protracted industry downturn. BMO's Mark Wilde said "you can’t fault Jim Pattison’s timing or his eye for value". From memory, he bought WFG near the lows in 2020, and tried to steal Canfor from the minority in 2019. It looks like the Vida and Millar Western acquisitions were also relative bargains. So I'd expect JP to know very well what is good for JP. If this pattern continues, some of his people's shrewd dealmaking will benefit the minority, and some will come at their expense.