Canada’s lumber industry is imperative to the country’s success. As of 2017, according to Natural Resources Canada the industry employed around 210 000 people in 2017, accounted for 7.2% of Canada’s total exports and contributed roughly $24.6 billion dollars to the economy. Canadian stocks that focus on lumber production have become extremely popular in 2020, due to prices rising.
Canada’s primary forestry areas are located in Ontario and Quebec. But there are also some areas in Western Canada that attribute to the industries supply.
As such, Canadian lumber stocks are a hot commodity on the TSX. The wild fluctuations in lumber demand tend to have a drastic effect on these Canadian lumber stocks. Overall the Canadian housing market is struggling at this time, and in turn these lumber companies are facing the same struggles.
But, if there is one thing that a softening Canadian housing market has done, it has made these lumber stocks fairly cheap. Here are my top 5 Canadian lumber stocks for 2019. You’ll be surprised at the number one stock, as while it isn’t a direct lumber play, I believe it is one of the best up and coming stocks that relies on forestry production to drive revenue.
Overall, these Canadian lumber stocks are down almost 29% on average in the last year. It has present some unique entry opportunities, but it is also important to study the Canadian and quite frankly worldwide lumber demand as a whole to see if these stocks are viable at your time of reading this. If you’re looking to buy stocks in Canada exposed to lumber prices, here are 5 solid options.
5. Canfor Pulp (CFP.TO)
Canfor Pulp (TSX:CFP) is a Canadian lumber stock that provides a unique global presence for Canadian investors as it has operations in both North America and Asia. The company operates in two segments. Lumber, and pulp & paper. With over 24 sawmills and 4 paper mills in North America, the company has a heavy presence in the North American lumber industry.
The Canadian housing market has a heavy impact on the stocks price, as lumber prices have a significant effect on the company’s earnings. As such, analysts are extremely bearish on the stock heading into 2019. Expected growth rates of -40% doesn’t exactly give prospective investors a lot of confidence.
However, the stock is trading extremely cheap due to bearish estimates and the overall negativity towards the Canadian housing market and lumber demand. The stock trades at only 8.17 times earnings, 0.37 price to sales and a 0.93 price to book. The stock has lost over half its value in just 10 months. While most inexperienced investors would stay far, far away from a company like this, experienced value investors can definitely see potential in this stock.
4. West Fraser Timber (WFT.TO)
West Fraser Timber (TSX:WFT) is probably one of the most popular Canadian lumber stocks. The company produces lumber, panels, pulp, newsprint, wood chips and energy. The lumber company primarily operates in Western Canada and the southern United States.
The U.S. housing market is booming, and as such West Fraser has been able to benefit. The current supply gap has resulted in generally higher prices for lumber companies like West Fraser. The company has recently bought back a significant portion of shares, totaling $675 million. As with most Canadian lumber companies, analysts are quite bearish on West Fraser for 2019. The company has a 1 year target price of $$60.87. which indicates almost 14% downside.
Growth is expected to stall in 2019 as well, with analysts predicting a mere 4.80% in growth for 2019. However, the company has provided investors with over 65% returns, not including dividends in the past 2 and a half years.
I’m not sure I’d be a buyer of West Fraser at this current time, but that doesn’t change the fact that it is one of the best Canadian lumber stocks trading on the TSX today. The choices are limited in terms of Canadian lumber companies. And if you’re looking for one that’s cheap, West Fraser fits this mold. Trading at a forward price to earnings of 12.66, a price to sales of 0.78 and a price to book of 1.66, West Fraser is undervalued.
3. Interfor Corp (IFP.TO)
Interfor (TSX:IFP) is a Canadian lumber stock with a rich history. The company began trading on the TSX in 1980 and it has established itself as a worldwide provider for a wide range of products. The company produces wood products in British Columbia and the United States and sells them globally. The Canadian lumber company has over 18 mills across the continent with an annual capacity of over 3 billion board feet.
The company is strategically purchasing new mills and upgrading old ones to improve production capacity. The lumber stock has a 1 year estimated price target of $21.00, which indicates 30% upside from today’s price.
In terms of earnings, the lumber company has been somewhat of a rollercoaster but for the most part has disappointed over the last 4 quarters. However, the company has grown at an annual rate of 25.84% over the last 5 years, and analysts are predicting 16% growth for 2019. Keep in mind, as lumber prices fluctuate, estimates are bound to do the same. If you’re thinking about investing in Canadian lumber stocks, you’ve got to keep a keen eye on the industry in general.
As most Canadian lumber stocks are these days, Interfor is trading at reasonable valuations. With a forward P/E of 13.04, price to book of 1.12 and a price to sales of 0.49, you’re not getting a bad price to take a position in the stock today.
2. Stella Jones (SJ.TO)
The runner up Canadian lumber stock on our list is Stella Jones (TSX:SJ). Stella Jones specializes in making pressure treated wood products. The company operates in five provinces and 18 states. It is the only lumber stock on this list that is a Canadian Dividend Aristocrat.
There are a few key points you need to take away when researching Stella Jones. Some are good, and some aren’t so good. Lets start with the good.
The company provides products to companies in highly regulated industries. The bulk of Stella Jones’s sales are from products such as utility poles for power companies and railroad ties for railroad companies. These products are frequently used to develop new infrastructure and necessary routine maintenance. The benefit of Stella’s supply to these industries is that regardless of economic conditions, maintenance on power lines and railroad tracks must be completed.
The bad? The reliance on these industries. The company receives almost 50% of its sales from its top ten customers, and over 25% from its top two customers. This isn’t exactly the most diverse customer base, and a loss of one of these clients could mean bad things for the company’s revenue stream.
The stock has over 23% upside as of today according to analyst estimates, and the general consensus among analysts is to buy this Canadian lumber company. Stella hasn’t had the best track record over the last year in terms of earnings reports, disappointing in all of them. However, with an estimated annual 5 year growth rate of 19%, analysts have big expectations for Stella in 2019, and I don’t think they will disappoint.
1. Pinnacle Renewables (PL.TO)
Pinnacle Renewables (TSX:PL) provides a unique opportunity for investors to get a piece of the Canadian lumber industry without actually investing in a company that deals directly with lumber production.
Pinnacle is a manufacturer of wood pellets, and it strategically uses industry partners to harvest wood for them from forestry areas. The company is very young and only began trading on the TSX a little over a year ago. The company’s backlog is growing, in fact it grew over 80% last year, so the demand for their wood pellets is obvious. The challenges that come with an investment in Pinnacle is its ability to maintain its market leading presence and also to keep demand up in a relatively young industry.
The renewable energy industry is in its infancy. And with industries that are just getting started, there can be technological advancements and new products that make older products obsolete. This will require the company to stay on its toes, constantly making advancements and making its product the go to resource.
However, I believe in Pinnacle. The demand for its wood pellets is expected to more than double by 2021. Analysts are predicting some heavy growth from the company in 2019. As it stands right now, they predict almost 60% upside for the wood pellet producer, and expected growth rates for 2019 are in excess of 500%. However, Pinnacle missed its Q3 earnings projections by a massive margin, missing by nearly 80% on EPS estimates. So, while the company may have a prosperous future ahead, an investment in Pinnacle right now is more than likely going to face significant volatility. If you’re a buyer, be ready for this and don’t get too short sighted, this is one for the long run.
Overall, these companies are highly dependent on commodity prices, and as such are prone to cyclical volatility.