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.”