What are we looking for?
Forestry and paper products companies include a fairly large group of stocks operating in different subsectors of the industry. These range from pulp and paper companies to producers of panels, such as strand board and plywood. With the recent rebound in commodity stocks, albeit from very low levels, we at Lorne Steinberg Wealth Management wanted to have a closer look to see which companies in the sector are trading at attractive valuations.
Using S&P Capital IQ, we reduced the number of companies in the sector by only looking at those with a market capitalization of $500-million (U.S.) and higher. We then limited our search to companies in the developed markets of North America and Europe.
As a measure of valuation, we screened for companies with an enterprise value/earnings before interest, depreciation, and amortization (EV/EBITDA) of less than nine times. (An EV multiple is a ratio that can be used to determine the value of a company. The multiple looks at a firm as a potential acquirer would, because it takes debt into account. A low ratio indicates that a company might be undervalued.)
We also wanted to limit our list to companies that generated positive free cash flow in the most recent reporting period. Finally, we wanted to see how the stocks in our list have performed over the past year.
What we found
Our table contains a fairly even mix of U.S., Canadian and European companies. Not surprisingly, most of the stocks on our list performed very poorly over the past year, which is to be expected in light of what transpired with commodity stocks in general. At the top of our list is Mondi PLC, which has seen some volatility in its share price, but ultimately has seen little change in its one-year performance. Mondi was spun off from commodities giant Anglo American PLC about 10 years ago.
While the company's origins are in South Africa, its head office in now in Britain, and most of the trading in its stock is now done on the London Stock Exchange. Mondi derives about 70 per cent of its revenue from packaging materials.
Further down our list, and the outlier in terms of its performance over the past year (with a gain of 11.3 per cent), is Western Forest Products Inc. The company, which is based in Vancouver, is involved in the harvesting of timber, reforestation and the sale of lumber and wood chips. The stock's performance is partly due to the fact that, in recent quarters, the company has been able to increase its operating margins, and this has been reflected in its financial results. Western Forest Products derives about half its revenue in Canada.
As always, investors are advised to do their own research before purchasing any of the stocks listed here.
Samuel Oubadia is a portfolio manager at Lorne Steinberg Wealth Management in Montreal.