Canfor Corporation (TSX:CFP) is one of the largest softwood lumber producers on the planet. The company has lumber mills in British Columbia, Alberta and in the U.S. Canfor has over six billion board-feet worth of production capacity in western Canada, about 73% of the company’s total capacity, and 27% capacity in the southeastern U.S.
The stock is still down nearly 40% from its high in the early part of 2015, but it has since started to rally this year. If you’re a contrarian investor looking for a rebound play, then you might want to add Canfor to your radar.
Strengthening U.S. economy could send lumber prices through the roof
Lumber is a key material needed in the construction of new houses. Sure, new-house-growth construction has been slow over the past couple of years, but it’s likely that we’ve hit a turning point as the American economy starts to heat up again under the Trump administration, which is expected to strengthen the U.S. economy over the next few years.
A strengthened U.S. economy under President Trump is very likely to cause a substantial increase in the amount of new housing units over the medium term. Charles Gross, an equity analyst at Morningstar, forecasts a 20% increase in pricing and segment operating margins with EBITDA increasing to approximately $750 million in 2019.
Morningstar analysts also expect new privately owned housing units started to reach 1.9 million in 2020 thanks to a surge in demand. After this peak is reached, it’s projected that it will gradually fall back to the 1.5 million level around 2025, where it’s expected to remain stable for the years that follow. These forecasts are major tailwinds that will lift Canfor out of the gutter. The company is on the verge of a cyclical upswing, and free cash flow could go through the roof over the next few years.
The company doesn’t pay a dividend, which may turn off many investors, but if you’re a contrarian investor, you’re probably only interested in huge capital gains from turnarounds. I believe Canfor is an excellent potential turnaround candidate, and Morningstar’s forecasted increase in “housing starts” south of the border will be a major catalyst that will propel Canfor higher over the next few years.
The stock currently trades at a 16.9 price-to-earnings multiple, a 1.7 price-to-book multiple, and a 0.6 price-to-sales multiple, all of which are lower than the company’s five-year historical average multiples of 36.4, 2.1, and 0.9, respectively. Canfor is definitely cheap, and I believe the company is a very smart contrarian play for an investor with a long-term horizon.
