With the Canadian dollar up and lumber prices down, lumber producers have been suffering throughout April. After hitting highs at the start of the month, Canfor Corp. shares have since slumped 18 per cent and West Fraser Timber Co. Ltd. shares have fallen 14 per cent.
If you're tempted to buy these dips, you might be alone: Paul Quinn, an analyst at RBC Dominion Securities, downgraded Canfor and West Fraser on Monday, slicing his recommendation on both stocks to "underperform" from "sector perform."
He noted that lumber prices surged last summer because of growing exports to China and optimism that the U.S. housing market had stabilized. The gains sent the share prices of Canadian lumber producers surging. However, a disappointing spring home-buying season in the United States has sent lumber prices retreating about 18 per cent, while the rising Canadian dollar is putting pressure on margins.
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"Canadian manufacturers are disadvantaged relative to their U.S. peers, with manufacturing costs in (high) Canadian dollars and selling prices in (low) U.S. dollars," Mr. Quinn said in a note. "We expect earnings to suffer in the first quarter as a result."
Meanwhile, he believes that rebuilding in Japan - a boon for some lumber producers - will be delayed and, anyway, is a "non-material event" for both companies.