What are we looking for?
North American timber companies that could benefit from an increased demand from the building industry for their products.
Last month, officials from almost 200 countries gathered in Poland to mark the third anniversary of the Paris Agreement and discuss how they were going to keep their promise of holding climate change this century to well below 2 degrees Celsius above preindustrial levels. The energy and transportation sectors receive a lot of attention in any climate-change discussions, but the building industry will also make the Paris goal difficult to achieve. Cement- and steel-making account for 6 per cent and 8 per cent of the world’s carbon emissions, respectively. Perhaps counterintuitively, the way to a greener future might be wood.
Producing a laminated wood beam requires one-sixth of the energy of making a steel one of equal strength, according to a report in The Economist. Wooden beams and panels are more easily recycled or repurposed than steel ones. A softwood window frame is 400 times more insulating than a steel version and 1,000 times more than an aluminum one. We use the Thomson Reuters Business Classification (TRBC) to consider North American companies in the forest and wood products industry that could benefit from a boost in demand for their products.
- First we look at valuation, and consider SmartEstimate forward (next 12 months) price-to-earnings ratio and a ratio known as EV/EBITDA, or enterprise value to earnings before interest, taxes, depreciation and amortization. P/E is a good barometer for the value an investor receives in buying the stock. EV/EBITDA is more of a measure of how attractive a company is as a takeover target. We filter out any company valued at more than 15 in either measure.
- Next, we consider analyst sentiment and filter out any company whose mean recommendation is greater than 2.75. A strong-sell recommendation is a 5, a sell is given a 4, a hold is a 3, a buy 2, and a strong buy 1, so a lower score is better.
- Finally, we look at the SmartEstimate for dividend yield over the next-12-months' horizon and require at least 2 per cent.
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What we found
The United States has more timber companies than Canada, but three of the four companies that pass this screen are Canadian.
Acadian Timber Corp., minority owned by Brookfield Asset Management’s private equity timber fund, was recently upgraded, to outperform, by RBC Dominion Securities. Acadian has shown a consistent ability to generate good financial results and generate free cash flow, and its high dividend yield makes it all the more attractive. Management has also shown prudence, reducing harvest levels in both New Brunswick and Maine in order to maximize returns during weak markets.
Investors are advised to do their own research before trading in any of the securities shown here.
Hugh Smith, CFA, MBA, is an investment management specialist at Refinitiv.