- Resolute Forest Products (NYSE:RFP): Improving bottom-line growth and net cash positive position bolsters the lumber stock
- Canfor (OTCMKTS:CFPZF): Strong balance sheet and low valuation metrics make the sustainable lumber producer a buy
- Boise Cascade (NYSE:BCC): Strong 2021 operational performance makes BCC well-positioned to capture additional opportunities
In recent months, lumber stocks outperformed equity markets, following surging lumber prices and persisting supply chain disruptions plaguing the market since the start of the pandemic.
Lumber prices reached a yearly high of $1,477.4 per thousand board feet (mbf) at the beginning of March 2021, since then wood prices slipped 36.4% to $939.3/mbf. Soaring inflation and interest rate increases prompted this sharp slip. With these evolutions, people will be less likely to spend in the future, which should curb wood demand and pressure lumber stocks.
Lumber stocks, measured by the iShares Global Timber & Forestry ETF (NASDAQ:WOOD) proxy, (above) declined marginally over the year, down less than 0.1% to $91.22 per share, whereas the iShares Russell 2000 ETF (NYSEARCA:IWM) dipped 13.04% over the period to $192.68 per share.
With the timber backdrop deteriorating, not all lumber stocks are positioned to withstand these challenges. These three lumber stocks offer elevated profit margins, low valuation metrics and strong capital structures, that are adequate to soften the impacts of falling timber prices.
|RFP||Resolute Forest Products, Inc.||$13.91|
|BCC||Boise Cascade Company||$74.63|
Lumber Stocks to Watch: Resolute Forest Products (RFP)
Resolute Forest Products (NYSE:RFP) is a global leader in the forest products industry with a range of products that include market pulp, wood products, and papers. Since the beginning of the year, RFP stock lost 10.66% to $13.07 per share, underperforming the timber sector.
Resolute recently announced that it completed the previously announced acquisition of the 50% equity interest of Louisiana-Pacific Corporation (NYSE:LPX), furthering the diversification of its activities and strengthening its financials.
Resolute’s financials are expected to improve this year despite declining top-line growth. After jumping 30.9% to $3.66 billion in 2021, net sales are expected to decline 4.7% year on year to $3.49 billion. On the other side, RFP’s bottom line is projected to advance vigorously this year, up 34.8% to $394 million, representing an annual profit margin of 11.3%.
With this appreciation, RFP is estimated to turn net cash positive this year, posting a cash position of $138 million versus net debt of $190 million in 2021. These constructive developments should attract investors back to the lumber stock.
Resolute is cheap in terms of valuation multiples. The stock trades at only 1.35x forward enterprise value (EV) on earnings before interest, taxes, depreciation and amortization (EBITDA). In addition, RFP stock trades 47% below its book value, posting a price-to-book (P/B) ratio of 0.53, whereas Wall Street analysts have a target price of $18 per share, representing a compelling upside of 36.6% in the next 12 months.
Canfor Corporation (CFPZF)
Canfor (OTCMKTS:CFPZF) is a Canada-based integrated forest products company and one of the world’s largest producers of sustainable lumber, pulp, and paper.
CFPZF stock took a beating this year, declining 21.32% to $19 per share after it announced the reduction in operating activities at its Western Canadian sawmills in response to the ongoing global supply chain crisis. This correction has created an opportunity for investors looking to enter a profitable and well-capitalized lumber company.
With this setback, Canfor’s net sales are projected to decline moderately in 2022, down 5.6% year-on-year to 7.25 billion CAD ($5.70 billion). Nevertheless and even if the profit margin will decelerate this year, CAFPZF stock maintains a strong margin of 14.5% per year.
Besides, the sustainable lumber producer has a healthy balance sheet, expected to advance 72.4% this year to 1.7 billion CAD.
Moreover, the timber group has low valuation metrics, exchanging at 0.67x 2022e EV/EBITDA and 0.65x forward P/B.
Analysts expect additional upside on Canfor. The stock is rated as a strong buy and has an average price target of $34.06 per share, corresponding to a potential appreciation of 77.45% from today’s closing price.
Lumber Stocks to Watch: Boise Cascade (BCC)
Boise Cascade (NYSE:BCC) is a producer of engineered wood products (EWP) and plywood in North America and a wholesale distributor of building products in the United States.
BCC stock outperformed the equity market and the timber complex year-to-date, advancing 6.02% to $75.29 per share.
The rating of the company was updated by two out of three analysts at the beginning of the year, offering an average target price of $81.60 per share, corresponding to an upside of 12.6% from today’s price.
Boise’s top-line revenue is however projected to flatten this year, posting a marginal decline of 0.7% year-on-year to $7.87 billion, compared to a rapid advance of 44.8% in 2021 to $7.92 billion. After last’s year strong advance, net income is estimated to shrink 22.5% this year to $552 million, shrinking profit margins by 198 basis points to 7.01%.
Despite that, BCC’s is well managed and has a strong balance sheet. The company’s net cash position is expected to surge 123.4% in 2022 to $679 million, whereas free cash flow is projected to rise robustly, up 32.1% year-on-year to $477 million.
The demand environment in 2022 is expected to remain strong for BCC’s products and the company is well-positioned to capture additional opportunities, which will sustain its stock price.
Boise Cascade is however more expensive than its lumber peers, posting a 2022e EV/EBITDA of 2.38x and a forward P/B ratio of 1.54x, but is still acceptable given its profitability.
On the date of publication, Cristian Docan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.