On today’s Breakouts report, there are 55 stocks on the positive breakouts list (stocks with positive price momentum), and 31 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appeared on the negative breakouts list earlier this month - Interfor Corp. (IFP-T).
Lumber stocks are trying to stabilize after plunging in recent weeks. Price weakness has been viewed as a buying opportunity by management. Last quarter, management repurchased over $20-million worth of shares at an average price just above $26. Investors may want to put this stock on their radar screens and wait for selling pressure to be exhausted.
Interfor has a unanimous buy recommendation from six analysts. The average one-year target price of $49.75, suggesting the stock may deliver a potential 65-per-cent return to investors over the next 12 months. The company is generating strong cash flows. As a result, management announced a special dividend last month.
A brief outline on the company is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
With its headquarters in Vancouver and operations across North America, Interfor is a leading lumber producer.
In 2020,0 78 per cent of the company’s sales came from the United States, 14 per cent from Canada, 3 per cent from Japan, 2 per cent from China/Taiwan with the balance coming from other regions.
Its sales mix was: approximately 84 per cent from lumber, roughly 8 per cent from logs, and around 7 per cent from wood chips and other products.
Investment thesis
- Solid demand for lumber (construction, and repair and renovation).
- Strong cash flow generation.
- Healthy balance sheet.
- Acquisition growth.
- Capital allocation to increase production and improve operational efficiencies.
- Looking out to 2022 and 2023, lumber assumptions in analysts’ valuation models may be conservative.
- Attractive stock valuation.
Industry fundamentals
On a May 7 earnings call, senior vice-president of sales and marketing Bart Bender provided a positive market outlook, saying: “The macroeconomic indicators are supporting continued confidence in our markets. Fiscal stimulus, job growth, and diminishing risks of COVID are encouraging spending, particularly in relation to new loan construction and repair and remodel. U.S. housing starts are trending positively. Repair and remodel spending continues to grow, while supporting an overall increase in the demand for lumber. North American lumber markets remain extremely active. The sawmills in North America are operating at effective capacity. Imports are forecast to grow in 2021. However, robust traditional markets and logistical challenges will temper that forecasted increase … Overall, we see strong market fundamentals that will elevate lumber demand in Q2 [second quarter] and beyond. We are expecting price volatility as markets adjust to high prices, seasonality, and supply chain risk.”
Since the majority of the company’s sales are from south of the border, the U.S. housing market is a key driver for Interfor’s earnings.
Last month, U.S. new home sales reported in April declined 5.9 per cent month-over-month but increased 48 per cent year-over-year. New homes sold came in at a seasonally adjusted annual rate of 863,000. On June 23, new home sales for May will be released.
One headwind faced by companies is transportation. Mr. Benton said: “Logistics has been a challenge of late. We are managing. However, it seems every week brings new challenges in different regions. At present, all of our regions are managing to get what they need, whether railcar or truck shipments. It just takes a bit longer. To be clear, we are managing with no significant inventory builds and expect logistics to be challenging through the balance of the year.”
At a Raymond James conference held earlier this month, president and chief executive officer of Weyerhaeuser Company (WY-N), a leading North American lumber producer, Devin Stockfish said he believes lumber prices will remain stronger for longer, “We’ve been in a great environment for lumber pricing here over the last several months. It’s really been a result of extraordinarily strong demand that hasn’t been met by the available supply. As we think about going forward, I’ve said this before, I don’t think $1,000 lumber prices are the new normal. But that being said, when you think about the amount of housing that we’re going to have to build in the U.S. over the next three, five, 10 years, that’s just a significant amount of demand for wood products. You layer on top of that, we believe you’re going to have continued good, healthy repair, remodel demand. So the wood products demand that we’re going to see, I really think over the next five to 10 years is going to be very strong. You’ll have some supply response. We’ll see continued supply coming on over a course of the next several years, but it’s going to be coming on in kind of slow increments because it takes time for that new capacity. So our view is, we should be on a strong wood products pricing demand here for a number of years as this housing boom continues to develop.”
Quarterly earnings
After the market closed on May 6, the company reported record first-quarter financial results. Interfor reported record adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $392-million driven by high lumber prices. The average price realized in the first quarter was $1,143 per thousand board feet, up 93 per cent year-over-year. As at March 31, the net cash position stood at $236-million.
On the earnings call, management commented on its recent capital expenditures aimed at improving operational efficiencies, saying “Our capital spending program continues to advance forward as we continue to modernize all of our operations, improving not only our operating costs, but also our value extraction from logs. Last quarter, we spent $29-million to improve our plans across all regions. And yesterday, we announced the additional spending on high payback projects at our Castlegar BC mill and our Perry, Georgia mill [for a] combined $70- million. Working capital and its impact on cash flow continues to be a key focus area for us. We implemented a new disciplined approach last year by better matching market demand to both our lumber and log inventories and our operating schedules. This means that we don’t build excess volume into the supply chain and we’re as lean and mean as possible.”
On May 27, the company announced the acquisition of four U.S. sawmills for US$375-million.
The company is expected to report its second-quarter financial results in early August. The consensus EBITDA estimate is $524-million.
Returning capital to shareholders
In the first quarter, the company was active in its share buyback program repurchasing 774,420 shares at an average price per share just above $26. On the May 7 earnings call, when asked about management’s priorities for returning capital to its shareholders, chief financial officer Rick Pozzebon said, “We like the opportunistic aspect of buying back shares at attractive values and certainly a special dividend would be the next option for us with any surplus cash that we have.”
On May 12, the company announced a special dividend of $2 per share.
President and chief executive officer Ian Fillinger said, ”This special dividend reflects a partial distribution of the extraordinary cash flows being generated from record lumber markets. We are able to reward our shareholders with this return of capital, while retaining ample financial flexibility to complete our multi-year strategic capital plans, grow significantly through acquisitions and continue to buy back Interfor shares. We are confident that our balanced and disciplined approach to capital allocation will continue to maximize value for our shareholders.”
The company does not pay its shareholders a regular dividend.
Analysts’ recommendations
This small-cap stock with a market capitalization of $1.97-billion is covered by six analysts. All have buy recommendations.
The firms providing research coverage on the company are: BMO Nesbitt Burns, CIBC World Markets, Raymond James, RBC Dominion Securities, Scotia Capital and TD Securities.
Revised recommendations
In May, all six analysts revised their expectations with four target price hikes and two targetcuts.
- BMO’s Mark Wilde to $41 from $31 (the low on the Street).
- CIBC’s Hamir Patel to $54 from $56.
- TD’s Sean Steuart to $47 from $45.
- Raymond James’ Daryl Swetlishoff by $3.50 to $63.50 (the high on the Street).
- RBC’s Paul Quinn to $47 from $37.
- ·Scotiabank’s Benoit Laprade by $2 to $48.
Financial forecasts
The Street is forecasting EBITDA of $1.5-billion in 2021, plunging to $653-million in 2022.
Earnings forecasts have increased materially in recent months. To illustrate, three months ago, the consensus EBITDA estimates were $718-million for 2021 and $430-million for 2022.
Valuation
The stock is trading at tough levels.
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 2.7 times the 2022 consensus estimate. Over the past three years, the stock has traded at a forward multiple ranging between 2.7 times and over 7 times with a three-year historical average of 4.8 times.
According to Bloomberg, the stock is trading at a discount compared to its peers. For instance, West Fraser Timber Co. Ltd. (WFG-T) is trading at an EV/EBITDA multiple of 4 times. Canfor Corp. (CFP-T) is trading at an EV/EBITDA multiple of 3.9 times. Western Forest Products Inc. (WEF-T) is trading at an EV/EBITDA multiple of 4.3 times.
The average one-year target price is $49.75, implying the share price may appreciate 65 per cent over the next 12 months. Individual target prices are as follows in numerical order: $41, $45, $47, $48, $54, and $63.50.
Insider transaction activity
Quarter-to-date, one insider has traded shares in the public market.
On June 8, Bruce Luxmoore, senior vice-president – southern operations, sold 4,000 shares at a price per share of $27.68, leaving 15,875 shares in this specific account (RRSP). Proceeds from the sale exceeded $110,000, not including trading fees.
Chart watch
Year-to-date, the share price is up 35 per cent.
On May 10, the stock price closed at $37.12 - a record high. However, the positive price momentum ended when lumber prices collapsed.
Looking at key resistance and support levels, the stock has initial resistance around $35, and after that there is major resistance around $37, near its record closing high of $37.12 set on May 10. Looking at the downside, the stock has initial technical support around $27. Failing that, there is strong support around $25, close to its 200-day moving average (at $24.40).
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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Jennifer Dowty