On today’s TSX Breakouts report, there are 40 stocks on the positive breakouts list (stocks with positive price momentum), and five securities are on the negative breakouts list (stocks with negative price momentum).
Gold and silver stocks continue to charge higher. Meanwhile, a number of forest products stocks are steadily recovering and discussed today is a lumber stock - Interfor Corp. (IFP-T).
Earlier this month, four analysts revised their expectations – all higher. The stock has a unanimous buy recommendation by six analysts. The average one-year target price implies a potential return of 17 per cent over the next 12 months. On June 23, strong U.S. new home sales data reported was positive news for the company given that the majority of Interfor’s sales come from the U.S.
However, with the share price up 16 per cent over the past four trading sessions and rising coronavirus cases being reported in major cities across the U.S., the positive price momentum in the share price may pause. In the near-term, the stock price may pullback, declining back down into the $10 range.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
With its headquarters in Vancouver and operations across North America, Interfor is a leading lumber producer.
In terms of geographical sales breakdown, in 2019, 72 per cent of the company’s sales came from the U.S., 15 per cent of its sales stemmed from Canada, 6 per cent of sales were from Japan, 3 per cent of sales were from China/Taiwan with the remaining 5 per cent coming from other regions.
Since the majority of the company’s sales are south of the border, the U.S. housing market is a key driver for Interfor’s earnings. On June 23, U.S. new home sales reported in May were strong. New homes sold came in at a seasonally adjusted annual rate of 676,000. This represents a 16.6 per cent increase compared to the prior month.
After the market closed on May 7, the company reported better-than-expected first-quarter financial results.
Reported adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $36.6-million, well above the consensus estimate of $25-million. Lumber prices strengthened during the quarter. The average lumber selling price increased to $592/mfbm (one thousand foot board measure, which equals one thousand square feet of lumber) from $566/mfbm realized last quarter.
Bart Bender, senior vice-president – sales and marketing, noted on the earnings call that the repair and renovation market remained “steady,” while “there are some positive signs that some homebuilders that face sharp declines in business in March and April may be –those may be short-lived.”
In the earnings release, management’s outlook was conservative, “Near-term lumber demand is expected to be negatively impacted by uncertainties related to COVID-19. However, industry-wide lumber production curtailments should help balance supply with demand. Interfor expects demand for lumber to normalize over the mid- to long-term, particularly in the North American repair and renovation, residential and industrial segments.”
The company’s has a healthy balance sheet. In March, the company increased its liquidity, issuing US$100-million of senior secured notes, to cushion downside risks arising from the coronavirus. Net debt-to-invested capital increased to 26.7 per cent from 21.3 per cent reported last quarter. Net debt increased to $322-million, from $225-million reported last quarter. The share price rallied 10 per cent the following trading day.
Management has maintained a prudent capital spending approach in this uncertain environment with high unemployment and a potential second wave of COVID-19 impacting economies. Management is reducing its capital spending plans to approximately $100-million this year, with plans to reduce its capital program below $100-million in 2021, if industry conditions warrant a reduction next year.
Dividend policy
The company does not pay its shareholders a dividend.
Analysts’ recommendations
This small-cap stock with a market capitalization of $772-million is actively covered by six analysts, and all six analysts have buy recommendations.
The six firms providing recent research coverage on the company are: BMO Nesbitt Burns, CIBC World Markets, Raymond James, RBC Dominion Securities, Scotia Capital, and TD Securities.
Revised recommendations
Earlier this month, four analysts revised their expectations – all higher.
- TD’s Sean Steuart to $13 from $12.
- Raymond James’ Daryl Swetlishoff by $4 to $13.50.
- RBC’s Paul Quinn to $14 from $12.
- CIBC’s Hamir Patel to $13 from $11.
Financial forecasts
The Street is forecasting EBITDA of $88-million in 2020, recovering to $158-million in 2021.
Earnings forecasts have declined sharply in recent months. To illustrate, three months ago, the consensus EBITDA estimates were $140-million for 2020 and $200-million for 2021.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 7.2 times the 2021 consensus estimate. This is at the high end of the historical trading range. Over the past three years, the stock has traded at a forward multiple ranging between 3 times (back in March 2020) and over 7 times with a three-year historical average of 5.4 times.
The average one-year target price is $13.42, implying the share price may appreciate 17 per cent over the next 12 months. Individual target prices are: $12 (from Scotia’s Benoit Laprade), two at $13, $13.50, $14, and $15 (BMO’s Mark Wilde).
Insider transaction activity
Year-to-date, four insiders have been buying shares in the public market, while no selling activity has been reported. The four insiders who have been purchasing shares are Ian Fillinger, the president and chief executive officer, Bart Barton, senior vice-president – sales and marketing, Bruce Luxmoore, vice-president – South operations, and director Doug Whitehead.
Quarter-to-date, two trades have been reported. On June 15, Bruce Luxmoore purchased 5,000 shares at a price per share of US$6.90. On May 14, Doug Whitehead acquired 5,000 shares at a price per share of $8.00 (Canadian).
Chart watch
The share price has been slowly recovering after plunging 59 per cent between March 4 (closed at $12.49) and March 23 (closed at $5.07). However, the stock’s year-to-date return remains in negative territory, down 22 per cent.
Looking at key resistance and support levels, the stock has initial resistance around $12, near its 200-day moving average (at $12.19) and after that there is major ceiling of resistance between $15 and $16. Looking at the downside, the stock has technical support around $10.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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Jennifer Dowty