Key Morningstar Metrics for Canfor Stock
- Fair Value Estimate: $27
- Star Rating: 5 Stars
- Economic Moat Rating: None
- Capital Allocation Rating: Standard
As we head into the holiday season, many Canadians have started shopping, albeit less than usual. As Deloitte Canada’s 2023 Holiday Retail Outlook finds, nearly half of Canadians intend to buy only what their family needs this season, and to pay for their holiday purchases, one in four consumers plan to postpone travel plans or cut back on their grocery spending. What do shoppers usually buy this time of year? Gifts, gift cards, and perhaps Christmas trees? For investors who want to shop, and want to keep with the tree theme – maybe this Canadian lumber company, that is trading at a 37% discount to our fair value estimate, may be a good bet! The stock is Canfor Corp.
Canfor Stock is Still Undervalued
Canfor Corp, Ticker CFP, has been impacted by the downturn in Canadian house prices. Higher interest rates have impacted new housing starts, and home renovations, which in term has affected demand for lumber. Morningstar analyst Spencer Liberman notes that this is the main headwind for Canfor, which has also led to lower selling prices for lumber.
Investors seeking dividends would be disappointed in this stock, as Canfor does not pay a dividend. Liberman points out that this is not uncommon for lumber companies as the businesses are very cyclical. Instead, lumber companies will buyback shares during boom times and refrain from distributions during demand troughs.
He expects single-family housing starts to slightly improve next year, but forecasts Canfor will be the beneficiary from a stronger housing and repair and remodel rebound in 2025. For now, the stock is trading at a significant discount to his $27 fair value estimate. For Morningstar, I’m Ruth Saldanha.
Canfor Stock Bulls Say
- Canfor is less exposed to new residential construction than some of its competitors, which should offer it some protection in the next housing downturn.
- Canfor’s growing mill capacity in the Southeastern U.S. will reduce its exposure to export taxes and trade disputes, allowing increased profit generation.
- Canfor should benefit soon from its shift toward the higher-margin NBSK pulp as the global pulp industry recovers from logistics challenges and oversupply.
Canfor Stock Bears Say
- Canfor’s reliance on lumber profitability could put the firm at risk during times of economic weakness.
- Continued curtailments of harvesting rights in British Columbia could materially affect Canfor’s ability to source lumber outside of the Southeastern U.S.
- U.S. homebuyers could continue a shift toward multifamily units rather than single family, causing lumber demand to decline.
