Which of My 2 Favourite Undervalued Lumber Stocks Is a Better Buy?

Canfor Corp. (TSX:CFP) is a strong buy today, with attractive valuation and some growth ahead. But how does it fare against a competitor?

| More on:
Dice engraved with the words buy and sell

Image source: Getty Images.

There are some distinct trends in undervaluation on the S&P/TSX Composite Index at the moment: miners, auto-related companies, and forest product companies. While miners are getting a fair amount of speculative airtime, auto stocks are being widely ignored – in part because of the fear of additional tariffs. Likewise, lumber tariffs seem to have caused undervaluation in forest product stocks.

Is bearishness warranted in these industries, or is there a case to be made for value opportunities – rather than traps – in some of the better stocks? The fact is that there are a lot of good quality stocks out there trading at deep discounts, so if you are value focused and know how to spot a bargain, the S&P/TSX Composite Index is your oyster.

Below you will find two decent forest products stocks with attractive valuation; let’s see which is the strongest play.

Interfor (TSX:IFP)

A domestic wood products that offers good value, Interfor is trading at a discount of 45% of its future cash flow value. Its P/E of 9.4 times earnings looks about right, while a P/B of 1.4 times book confirms undervaluation.

There’s been some inside buying of shares in the last six months, though not in volumes as great as sales within the company in the last 12 months.

This stock’s past performance looks solid: last year’s growth of 74.5% beats its five-year average of 30.8%, but trails the industry’s past one-year average of 90.7%, though a 12.1% expected shrinkage in earnings over the next couple of years doesn’t bode well and suggests a value trap.

No dividends are on offer, but a low debt level of 26.9% of net worth is acceptable.

Now let’s compare Interfor’s data with that of Canfor (TSX:CFP). Discounted by 44% of its future cash flow value, we see what looks on the face of it a similar valuation; however, a P/E of 7.1 times earnings is slightly lower than Interfor’s, a readable PEG of 3.5 times growth indicates growth ahead, and a P/B of 1.6 times book is in line with that P/E ratio.

Last year’s growth of 103.1% beats that past-year industry average of 90.7%, as well as its own five-year average of 15.3%, while a 2% expected annual growth in earnings over the next couple of years is at least positive.

Again, no dividends are on offer, though a debt level of 16.8% of net worth is even lower than Interfor’s. In terms of inside buying, more shares were bought than sold in the last 12 months, signaling greater confidence in business than is the case with Interfor.

The bottom line

Two great industries and three quantifiably undervalued stocks. Of the forest products stocks, Canfor is the strongest buy, based on growth both past and future. Where it falls down on value is its PEG, which is a little high for its expected growth.

However, it remains a good quality stock with low debt, and at least signals some growth ahead, making Canfor a value opportunity and therefore a decent buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.

More on Dividend Stocks

Question marks in a pile
Dividend Stocks

Where Will Brookfield Infrastructure Partners Stock Be in 5 Years?

Brookfield Infrastructure Partners (TSX:BIP.UN) kicked off 2024 with a bang. Where will it be in five years?

Read more »

Dividend Stocks

Golden Years Gain: Your CPP Benefits at Age 70

CPP users delaying pension payments until 70 will receive substantial monthly income streams in the golden years.

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Dividend Stocks

3 Dividend Stocks You Can Safely Hold for Decades

Top TSX dividend stocks are on sale.

Read more »

Dividend Stocks

Where Will Canadian Utilities Stock Be in 5 Years?

Canadian Utilities (TSX:CSU) is a classic example of a stock where the dividend is all you get. Can the company…

Read more »

Man holding magnifying glass over a document
Dividend Stocks

2 Stocks I’m Watching for Big Passive Income

Consider Bank of Nova Scotia (TSX:BNS) and another top passive-income play to power your dividend portfolio!

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

These top TSX stocks have increased their dividends annually for decades.

Read more »

bulb idea thinking
Dividend Stocks

2 Supercharged Dividend Stocks to Buy if There’s a Stock Market Sell-Off

These two top stocks offer attractive yields, have reliable operations and are dividend aristocrats, making them two of the best…

Read more »

question marks written reminders tickets
Dividend Stocks

Better Buy: Loblaw Companies or Metro Stock?

Loblaw Companies (TSX:L) stock is riding on recent momentum. Meanwhile, Metro (TSX:MRU) is executing for future earnings growth.

Read more »