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

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »