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Stock to Watch

Stock to Watch: Norbord still offers good way to play U.S. housing rally Add to ...

Norbord Inc.

 

Thursday's close: $35.03 a share

52-week trading range: $11.76 to $37.93 a share

Annual dividend: $2.40 a share for a yield of 6.9 per cent

Analysts’ ratings: There were five buys, five holds and no sells, according to Bloomberg data. Target prices ranged from $29 a share as estimated by Raymond James analyst Daryl Swetlishoff to $44 by Credit Suisse analyst Andrew Kuske.

Recent history: Shares of the wood panel manufacturer have soared nearly 185 per cent over the past year as oriented strand board (OSB) prices have climbed higher on the back of a U.S. housing recovery. Norbord, which produces the wood-based panels, is 53 per cent controlled by Brookfield Asset Management Inc. OSB prices, which collapsed after the U.S. housing market began its downturn in 2006, have been rebounding since late 2011. In April, Norbord reported a first-quarter profit of $67-million (U.S.), or $1.25 per diluted share, on sales of $365-million, versus break-even on sales of $253-million in the same period a year earlier. At that time, it announced a quarterly dividend of 60 cents a share, the first in more than four years. That dividend could fluctuate as the fortunes of forestry companies are sensitive to economic growth.

Manager insight: Norbord, which was removed from the S&P/TSX composite index in 2008 after its stock took a beating, could have a near-term pop if it gets invited back when the benchmark is rebalanced for the end of the second quarter, says John Stephenson, a portfolio manager with First Asset Investment Management Inc.

“I believe that Norbord will be added to the index,” while battered gold stocks are among candidates that could be tossed out, said Mr. Stephenson. He has owned Norbord shares for about three months as a way to play the U.S. housing rebound.

Proposed index changes are expected to be announced on Friday after the markets close, and take effect on June 21. Investors could benefit from potential near-term price appreciation as providers of index or exchanged-traded funds (ETFs) tracking the Canadian stock market need to buy Norbord shares at the same time, he said.

The manager expects that index providers will be snapping up just over 800,000 Norbord shares. “My understanding is that they wouldn’t rebalance their portfolios until these changes take effect so investors have a week essentially where they could buy some shares,” and benefit from rising demand, he said.

Despite their strong runup, Norbord shares are trading “fairly reasonable” at 12 times forward earnings, and also offer a nearly 7-per-cent dividend yield, he said. “Norbord is a cyclical stock so it is not something that you can buy and put away for five years. I think you have a two-year window.... My target is $41.50 over 12 months.”

House prices in major U.S. markets such as Florida are seeing strong growth, while most forecasters are calling for housing starts to rise over the next couple of years and peak at an annualized 1.5 million units in 2015, he said.

The way to bet on U.S. housing now is through lumber stocks – such as Norbord – because U.S. homebuilders like PulteGroup Inc., Lennar Corp. and Toll Brothers Inc. already have had a “phenomenal run” over the last year and a half, he said. “Both the homebuilders and lumber stocks essentially went through a near-death experience [when the housing bubble burst].”

The risk to Norbord shares would be a derailed U.S. housing recovery, but “I do not see that happening,” he said. “I think [the recovery] is accelerating and not slowing.”

Norbord also sells its wood products in Europe, where the economies are weak, but the company’s mills there are running at virtually 100-per-cent of capacity, he noted. “They just have efficient mills.... That is another bright side to the story.”

 

 

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