Why is Canfor Stock So Cheap?

Lumber companies have had a difficult 18-months as higher interest rates weighed on housing markets, which helped drive lumber prices lower. 

Ruth Saldanha 10 August, 2023 | 4:13PM
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Key Takeaways on Canfor Stock

  • Lumber companies have had a difficult 18-months as higher interest rates weighed on housing markets, which helped drive lumber prices lower
  • Canfor is mainly a dimensional lumber producer and is not as diversified as other companies like West Fraser and Weyerhaeuser
  • The Canfor stock is trading at a 23% discount to our fair value estimate

Ruth Saldanha: Canfor Corp (CFP) one of the largest softwood lumber producers in the world, has had a rough time of it recently. Challenging market conditions and lower lumber prices have weighed heavily on the company in the first half of the year.

In its latest quarterly earnings announcement, we saw that revenue declined roughly 33% year over year on lower lumber prices and weak pulp demand. Canfor reported an almost $67 million operating loss in the quarter.

Why is Canfor Stock So Cheap?

Morningstar analyst Spencer Liberman points out that lumber companies have had a difficult 18-months as higher interest rates weighed on housing markets, which helped drive lumber prices lower. He says that Canfor still faces a lot of near-term pressures, as on top of the current marco environment for lumber companies, Canfor is heavily exposed to Canadian lumber production, which is generally more expensive than running mills in the U.S south.

Liberman anticipates that given the current operating environment, Canfor’s lumber business will remain pressured through the end of the year and will likely post a full-year operating loss for 2023. Canfor is mainly a dimensional lumber producer and is not as diversified as other companies like West Fraser and Weyerhaeuser. 

That said, he feels that the recent closures of two plants should provide some relief for operating costs in the second half of the year.

For now, Liberman is maintaining his $27 fair value estimate for Canfor stock, which is trading at a 23% discount at present.

For Morningstar, I’m Ruth Saldanha

bullsCanfor Stock Bulls Say

  • Canfor is less exposed to new residential construction than some of its competitors, which should offer it some protection in the next housing downturn.
  • Canfor’s growing mill capacity in the Southeastern U.S. will reduce its exposure to export taxes and trade disputes, allowing increased profit generation.
  • Canfor should benefit soon from its shift toward the higher-margin NBSK pulp as the global pulp industry recovers from logistics challenges and oversupply.

bears Canfor Stock Bears Say

  • Canfor’s reliance on lumber profitability could put the firm at risk during times of economic weakness.
  • Continued curtailments of harvesting rights in British Columbia could materially affect Canfor’s ability to source lumber outside of the Southeastern U.S.
  • U.S. homebuyers could continue a shift toward multifamily units rather than single family, causing lumber demand to decline.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Canfor Corp15.07 CAD1.21Rating
West Fraser Timber Co.Ltd108.20 CAD-1.39Rating
Weyerhaeuser Co29.15 USD0.52Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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