Stock of the Week: Norbord

Wood’s on fire right now

Andrew Willis 23 November, 2020 | 1:26AM
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*Update: On Nov. 19, West Fraser announced the planned acquisition of Norbord. In our view, the deal looks more favorable to West Fraser's shareholders than Norbord's. Accordingly, we have increased our West Fraser fair value estimate to CAD 56 per share from CAD 53 while we maintain our Norbord fair value estimate at CAD 36 per share. The combined firm will still lack a competitive advantage, in our eyes, consistent with our predeal no-moat ratings for both companies.

Andrew Willis: Who’d have thought that ‘wood’ would have rallied in a pandemic? Turns out, when everyone’s stuck at home, they start thinking about renovations, even as new home building is gaining momentum.

All of this has equalled a stellar year for ‘oriented strand board’ manufacturer Norbord. The company increased sales by a whopping 88% since last year due to a run-up in wood prices from sheer demand. As a result, we’ve increased our fair value estimate for the company from $33 to $36.

But will it last?

We think Norbord is overvalued, because we feel that the supply shortage in wood was responsible for nearly all of the recent gains – and this is likely a temporary phenomenon.

Equity analyst Charles Gross notes that the normal nature of the plywood business is highly cyclical and tied to macroeconomic vulnerabilities. We’re still dealing with massive economic uncertainties which could weigh on employment, wage growth and housing demand…. And then there’s also the skepticism around the sustainability of housing demand in Canada that existed well before the pandemic…

While the collection of short-term trends have been great for this company, investors in real estate should focus on levels that are sustainable demographically.

It’s a lot to ask the average Canadian to buy a detached single-family home, which consumes 3-4 times as much plywood as a multifamily unit. And at this point, we’re looking as far as 2023 for housing demand to meaningfully outpace supply again – if by then everyone hasn’t returned to concrete condos in the city.

For Morningstar, I’m Andrew Willis.

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Andrew Willis

Andrew Willis  is Content Editor for Morningstar.ca. Follow him on Twitter @AndrewWillisCDN.

 

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