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(Interfor)
(Interfor)

FORESTRY

Interfor: A bullish bet, despite its strong run Add to ...

Investors hoping to build their portfolios by playing the U.S. housing recovery are snapping up shares of International Forest Products Ltd. as its production expands south of the border.

The stock hit a 20-year high on Monday and already bullish analysts hiked their target prices after the Vancouver-based company said it was buying two Georgia sawmills for $180-million (U.S.) from Ilim Timber Continental SA.

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Shares of the company, known as Interfor, have risen nearly 90 per cent over the past year and are up about 1,200 per cent for anyone brave enough to have bought them during the depths of the last recession.

Regardless of that remarkable runup and concerns the U.S. recovery is still wobbly, analysts believe Interfor’s stock will continue to soar. All seven who cover the stock recommend it as a “buy,” citing a supply-demand crunch across the sector.

Lumber is in short supply due to production cutbacks since the recession and the pine beetle epidemic that has ravaged forests across parts of Western Canada. Meantime, lumber demand is increasing in the world’s two largest economies: the United States and China.

The falling Canadian dollar is also expected to help boost fortunes of forestry companies catering to the U.S. market. Including its latest acquisition, about 60 per cent of Interfor’s capacity will be south of the border.

Interfor is believed to be well positioned because it’s a pure lumber play with a growing U.S. footprint. “If you like lumber, with the recovering housing market, it’s a great way to go,” said RBC Dominion Securities analyst Paul Quinn, who raised his target on Interfor to $19 from $16.

Interfor shares closed up $1.66, or 10.9 per cent, to $16.86 on the Toronto Stock Exchange on Monday. It hit $17.25 in early trading, its highest level since March, 1994. The company’s market capitalization also surpassed $1-billion for the first time on Monday.

While the entire sector has been performing well over the past year, Interfor’s stock has outpaced the industry’s two largest – and more diversified – players, Canfor Corp. and West Fraser Timber, which are up 60 and 35 per cent respectively.

CIBC World Markets analyst Mark Kennedy sees strength across the sector, but more growth in the smaller forestry companies such as Interfor and Western Forest Products. “The lumber business is still looking at three or four years of pretty steady earnings performance,” he said.

On Monday, he increased his Interfor price target to $21.50 from $17.50, in light of the latest U.S. acquisition.

The deal will increase Interfor’s production capacity by about 20 per cent, making it one of the top five lumber companies in North America.

Raymond James analyst Daryl Swetlishoff raised his target price to $22 from $19, believing the new U.S. mills will add leverage to what he calls the “lumber super-cycle.”

“The U.S. market was laying on its belly and now it’s up on one knee,” he said, suggesting there’s still room for growth.

Interfor could also be a potential takeover target, which makes it attractive to money managers such as J.C. Clark Ltd., which holds it in a number of its funds.

Colin Stewart, J.C. Clark’s chief executive officer and a portfolio manager at the firm, said they like Canadian companies that can benefit from the U.S. housing recovery, while recognizing there is a risk of the American economy not bouncing back as quickly as expected.

National Bank Financial analyst Rupert Merer said demand from China is helping to drive up lumber prices, alongside the U.S. housing recovery. He noted recently that exports to China late last year were running at the highest level in history.

“I think we’re still fairly early on in this cycle,” he said, adding that the multiples on the stock are reasonable.

Even investors who have bailed on the stock are thinking about buying back in.

Bruce Campbell, a portfolio manager at StoneCastle Investment Management Inc., said his firm sold Interfor shares last summer in a fund managed for Redwood Asset Management. It saw more growth potential in other forestry stocks at the time.

“There is a chance it could be added in again,” said Mr. Campbell, who added he will wait to see how the latest acquisition plays out.

 
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