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What are we looking for?

Last week’s tariff surprise has caused a lot of tension in world trade. One of the recent concerns for Canadian investors is the impact of the imposed tariffs on aluminium and steel producers and the possible action toward the lumber industry. Because of growing concern over trade wars, today we will analyze the materials industry to identify players that have proven sustainable sales and growth.

We screened the S&P/TSX Materials sector for companies with the following qualities, including two measures of wealth creation, EPI and EVA:

  • A return on capital greater than the market average of 6 per cent;
  •  An economic performance index (EPI) change greater than or equal to zero over 12 months and 24 months. The EPI is the ratio of return on capital to cost of capital. It gives shareholders an idea of how much return is generated from each dollar spent;
  • Positive change in economic value-added (EVA) over three months, 12 months and 24 months. This measures the momentum of the wealth-creating ability of the company. Note that EVA is the net operating profit after tax, or NOPAT, minus capital charge (cost of capital times the amount of invested capital);
  • A positive sales change over 12 months and 24 months.

For informational purposes we have also included dividend yield and future-growth-value-to-market-value (FGV/MV) ratio. Note that FGV/MV represents the proportion of the market value of the company that is made up of future growth expectations, rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk.

Please note that some ratios shown are based on an end-of-quarter reporting.

More about Inovestor

Inovestor for Advisors is a research platform application based on the economic profit approach. It aids advisers in quickly identifying attractive investment opportunities and easily communicating them to their clients. In addition to providing detailed reports on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts), Inovestor allows investors to create personalized filters and build custom portfolios.

What we found

We came up with a list of 13 companies. A very interesting finding is West Fraser Timber Co. Ltd., a Vancouver-based company. West Fraser possesses an impressive and stable rise in EVA consistent with its soaring stock price. In addition, comparing the future growth value to its market value gives us a near-zero figure, signifying a stock priced at par.

Select TSX-listed materials equities

CompanyTickerMarket Cap. ($Mil)FGV on MVEVA % Chg. 3MEVA % Chg. 12MEVA % Chg. 24MR/CSales ($Mil)12M Sales Chg.24M Sales Chg.12M EPI Chg.24M EPI Chg.Div. YieldRecent Price1Y Return
Teck Resources Ltd.TECK.B-T20,42625.7%,24616.7%54.4%21.0%76.6%2.0%$35.6146.2%
West Fraser Timber Co.WFT-T7,287-0.6%,30916.4%27.5%17.7%149.6%N/A$93.5160.2%
Canfor Corp.CFP-T4,173-27.8%,76611.0%17.3%77.7%113.1%N/A$32.4468.8%
Cascades Inc.CAS-T1,191-153.0%,41310.2%11.6%84.5%143.5%1.2%$12.57-23.9%
Methanex Corp.MX-T7,48259.7%,11331.7%51.4%45.9%54.8%2.0%$90.0059.0%
Norbord Inc.OSB-T4,728-21.0%,93120.7%44.8%122.3%250.4%4.3%$54.6640.5%
Lundin Mining Corp.LUN-T5,92116.1%,55924.1%27.4%63.6%64.0%1.4%$8.109.3%
Interfor Corp.IFP-T1,80114.2%,06113.5%20.8%3.3%71.5%N/A$25.7246.3%
Hudbay Minerals Inc.HBM-T2,176-12.0%,93231.1%52.9%60.0%85.8%N/A$8.3320.5%
Iamgold Corp.IMG-T3,71316.8%1.34.410.26.1%1,4749.2%26.0%38.5%144.0%N/A$7.9634.6%
Ces Energy Solutions Corp.CEU-T1,39056.8%,07857.8%65.0%48.9%56.2%0.5%$5.18-16.3%
Kirkland Lake Gold Ltd.KL-T5,13568.2%$24.31127.0%
Alacer Gold Corp.ASR-T708-66.2%$2.4120.2%
Group Average:(13/54)5,087-1.8%,39726.0%46.5%55.1%102.0%1.7%$30.8337.9%

Source: Inovestor

On the other hand, Toronto-based Norbord Inc., an international manufacturer of wood-based panels, is currently trading at a discount. OSB generates the highest return on capital of all the companies on the list. This is an important metric because it supports the steadiness of wealth creation a company can offer its shareholders.

In addition, both of these companies have an advantage against a tariff trade war since a significant part of their production is situated in the United States: 42 per cent for West Fraser and 38 per cent for Norbord, according to their respective annual reports.

Noor Hussain is an account executive for Inovestor Inc.

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