The devastating earthquake in Japan and the growing nuclear crisis has sparked a harsh selloff in commodity-related stocks. There's one sector that's bucking the trend: forestry products. But TD Newcrest cautions that doesn't mean companies in the sector are buys right now.
In the short term, analyst Sean Steuart says possible damage to Japanese pulp and paper mills may increase the need for imported paper and forest products from North America and other regions. In the mid to long term, the rebuilding effort is likely to benefit Western Canadian forestry companies that already export product to Japan, including lumber, logs and panels.
"We believe that the longer-term benefits associated with the rebuilding effort are more significant than any potential near-term bump in Canadian pulp and paper exports to Japan," Mr. Steuart said in a research note.
However, the bounce in these stocks has already occurred, with shares in Canadian lumber and timber equities posting sharp gains over the past couple of days. As a result, "valuations already reflect much of the potential upside," said Mr. Steuart.
Also, in the near term, there will likely be a reduction in demand for most forest products due to infrastructure disruptions, including to roads, ports and utilities.
As such, he's not making any changes to earnings estimates or target prices for now, but suggests the following Canadian firms will have the most potential leverage to the Japanese rebuilding efforts: TimberWest Forest Corp. , Interfor Ltd. , Western Forest Products Inc. , Canfor Corp. , and West Fraser Timber Co. Ltd. .
Even though Teck Resources Ltd. reported its first-quarter coal sales will be lower than expected due to bad weather and other unusual problems, "recent share price weakness has already priced in considerable downside risks and created compelling upside reward," said CIBC World Markets Inc. analyst Alec Kodatsky. The company is maintaining its full-year production guidance, but is facing higher costs due to increased fuel and labour costs, he added.
Upside: Mr. Kodatsky maintained a "sector outperformer" rating and price target of $70 a share.
Related: Teck slashes coal sales guidance
Grande Cache Coal Corp. is now largely trading in line with its peers following a recent pullback in share price, said CIBC World Markets Inc. analyst Alec Kodatsky. He believes the stock will be supported by higher-than-expected coal prices in the second quarter, but remains cautious on near-term production given recent operating challenges.
Upside: Mr. Kodatsky upgraded the company to "sector performer" and raised his price target by 30 cents to $10.30.
Brookfield Real Estate Services Inc. , which restructured to a corporation in December and reported slightly better-than-expected cash flow in the fourth quarter, should benefit from generally positive conditions in the balanced Canadian residential market, said CIBC World Markets Inc. analyst Brad Sturges. He expects the company's royalty revenue to rise this year and next thanks to growth in its realtor network.
Upside: Mr. Sturges raised his price target by $2 to $16.
While Com Dev International Ltd. reported first-quarter revenue, the manufacturer of space hardware equipment is close to moving past a lengthy period of program cost overruns and is making good progress on its exactEarth maritime monitoring business, said National Bank Financial analyst Kris Thompson. "We believe it's time to evaluate an investment in Com Dev," he said.
Upside: Mr. Thompson upgraded the stock to "sector perform" and increased his price target by 40 cents to $2.40.
Stella-Jones Inc. reported solid fourth-quarter results that demonstrates the company's "shift to a higher-level competitive position," said RBC Dominion Securities Inc. analyst Sara O'Brien. The producer of pressure-treated railway ties and wood poles is paying down debt and is both an "organic and acquisition growth story" that will likely become a higher-yielding dividend payer in three to four years, she said.
Upside: RBC raised its price target by $9 to $48.