While he thinks fundamentals support long-term upside for forest products companies and sees them remaining in “deep value territory,” Raymond James analyst Daryl Swetlishoff reduced his earnings expectations for 2024.
“Once again, the seasonal lumber trade has outperformed the market with lumber up 25 per cent and building materials stocks up 21 per cent (vs the TSX up 17 per cent) since last Halloween,” he said in a Wednesday report. “While typically peaking in February (around Super Bowl) the trade extended into March this year; we expect largely due to weather issues. However, with Southern Yellow Pine (SYP) lumber prices and Spruce-Pine-Fir (SPF) CME lumber futures selling off we expect the trade is getting long in the tooth.”
“Despite the gains, the sector remains undeniably inexpensive with price-to-book valuations underscoring bargain-basement value. In fact, Canfor and Interfor exhibit valuations in line with the Covid-low while only marginally trading above historic troughs observed during the Great Financial crisis (2008). While some investors may opt to reduce exposure, tightening market fundamentals along with cheap absolute and relative valuations support our continued constructive outlook over the next 12-18 mos. Accordingly, we recommend adding to positions should commodity pricing pull back over the summer months.”
The analyst said he’s “cautious” on first-quarter results though his refreshed financial estimates “positioned marginally below consensus estimates for the bulk of our coverage list.”
“Most of the decline can be attributed to lagging SYP lumber markets with the current spread surpassing 5 times historic norms!,” he said. “With current price quotes implying break-even margins for the U.S. South region we expect additional curtailment announcements to stem further declines. Conversely, OSB pricing continues to run ahead of our forecasts leading to a boost to West Fraser’s consolidated EBITDA forecast.”
“With 50 per cent of wood products earnings coming from rallying OSB, we maintain our Analyst Current Favorite pick West Fraser at Strong Buy. Doman Building Materials also remains a top pick warranting our highest investment rating given its reduced earnings volatility and recent accretive M&A.”
He has a “strong buy” recommendation and US$105 target for West Fraser and a “strong buy” rating and $10.75 target for Doman . The averages are US$101 and $10.29, respectively.