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What are we looking for?

Valuations for the largest forest product stocks trading on the Toronto Stock Exchange.

This sector comprises two industries: companies that grow timber, mill lumber, and manufacture wood and wood products for construction; and companies that manufacture and market paper and paper-related products from wood pulp and other fibres. Both industries are benefiting from high commodity prices; today we look at whether that may indicate opportunities for investors.

The screen

We used StockCalc’s screener to select the 10 largest forest product companies by market capitalization on the TSX. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether it is undervalued or overvalued compared with its price.

Overview of the techniques used:

  • Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
  • A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
  • An adjusted book value (ABV) is calculated by multiplying book value per share by its 10-year average price-to-book ratio.
  • If we have analyst coverage, we look at the consensus target price.

More about StockCalc

StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code Globe30, which offers a 30-day free trial and special pricing for the second month.

What we found

Largest forest product stocks on the TSX

CompanyTickerMkt. Cap. ($ Mil.)Recent Close ($)StockCalc Val ($)Diff. (%)DCF Value ($)Price Comps ($)ABV ($)Analyst Tgt. ($)Div. Yld. (%)1Y Rtn. (%)
West Fraser TimberWFG-T 11,448.8 122.32143.17 17.0 227.00121.03239.57187.450.842.4
Canfor Corp.CFP-T 3,426.5 27.7332.04 15.5 60.7236.8441.9545.50n/a5.2
Stella-JonesSJ-T 2,630.3 40.7147.86 17.6 35.8220.5759.7252.691.8-12.7
Interfor Corp.IFP-T 1,951.2 35.1238.98 11.0 96.0030.1932.6750.83n/a39.9
Cascades Inc.CAS-T 1,585.1 12.8915.01 16.4 63.682.9615.0117.503.7-16.4
Resolute Forest Prod.RFP-T 1,191.5 14.6116.98 16.2 48.9418.368.6829.46n/a52.9
Western Forest Prod.WEF-T 758.4 1.992.37 19.1 2.712.152.572.632.050.4
Canfor Pulp ProductsCFX-T 430.0 5.966.43 7.9 -3.794.7313.587.50n/a-34.3
Acadian Timber Corp.ADN-T 303.8 18.8219.15 1.8 24.173.0919.4618.556.219.3
Conifex Timber Inc.CFF-T 83.9 2.152.39 11.2 6.341.971.713.00n/a31.9

Source: StockCalc

You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from the models and analyst target data, if used.

As with many industries, stock prices are very dependent on the underlying commodity prices, in this case lumber, and pulp and paper. Lumber prices are about three times their historical average and the price for northern bleached softwood kraft (NBSK), the benchmark grade for pulp, is near all-time highs. These elevated commodity prices are helping companies generate historically high free cash flow levels, which in turn is leading to very high discounted cash flow valuations for most companies on our list. Our adjusted book valuations along with analyst consensus targets also tend to be well above current prices, all pointing to higher prices for these stocks – on the back of large gains for some of them over the past 52 weeks.

It is worth noting these companies will use that cash flow in a number of ways: In the current environment the cash flow is necessary to pay for rising energy, raw material and freight costs. Beyond that, companies can pay down debt, add capacity to existing plants, acquire assets, buy back shares, increase dividends or pay special dividends.

Let’s look at a couple of these companies:

Lumber and engineered wood products represent more than 90 per cent of West Fraser Timber Co. Ltd.’s total revenue and it has 66 mills located in Western Canada and the southern United States. Free cash flow for the company is now above $40 a share when historically it would seldom get to $10 on a per-share basis. Meanwhile, price-to-earnings and price-to-cash-flow ratios are at record lows as earnings and cash flow rise faster than the stock price. Our valuation models show West Fraser as undervalued with three of our four valuations well above current prices.

Resolute Forest Products Inc. owns or operates 40 pulp, paper, tissue and wood products facilities in the United States, Eastern Canada, and South Korea. The cash flow generated in 2021 allowed it to reduce debt, invest in its business and return cash to shareholders. Our models also show Resolute as undervalued with three of our four valuations currently above stock price.

Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Full disclosure: The author currently owns shares of WFG and WEF.

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.

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