Analysts Construct Bullish Earnings Forecasts for Canfor Corp.

Lumber prices and forest products companies are among the beneficiaries of the rebound in the U.S. housing market, and that is setting the stage for a blockbuster year of earnings surprises for Canfor Corp. (CFP.TO)

The housing market was one of the best performing sectors of both the U.S. economy and the stock market last year, but it isn’t only homebuilders whose earnings are benefitting as a result. The other winners include the forest products companies who have been kept busier than they have been in recent years supplying lumber products to home builders, contractors and others busily at work on new home construction and renovation of existing buildings. One of these is Canfor Corp. (CFP.TO), a Canadian-based forest products company that appears poised to report better-than-expected earnings for the fourth quarter of 2012 early next month.

You don’t have to look far to discover why Canfor, which has forest products operations in British Columbia and Alberta as well as Quebec and in parts of the United States, might be generating healthy sales and profits. The chart below shows the trend in housing starts since the real estate and mortgage lending bubbles burst in 2008. Clearly, they have been rising steadily, climbing to an annual rate of 888,000 new homes last October before leveling off to 851,000 in November and then surging again in December to 954,000.

A second chart spells out precisely why this has been a boon for Canfor. As the number housing starts has climbed, so, too, has the price of lumber soared, more than doubling over the last three years. The price of RL-Western SPF (Random Length Western Spruce-Pine-Firs) has increased from less than $150 per 1,000 board feet in early 2009 to $388 per 1,000 board feet as of Jan 1, 2013. Given the widespread expectation among economists and analysts that the housing market will remain healthy, those prices are more likely stay at their high levels or climb higher than they are to fall.During the third quarter, Canfor said, lumber demand from the United States continued to improve slowly, thanks in part to low mortgage rate. That’s a boon for Canfor’s earnings.

But it’s not just about what is happening to the south of Canfor’s home base in Canada. Sales to China now account for 30% of all shipments and as the Chinese government remains focused on providing stimulus to its own economy, that is likely to sustain a strong level of demand for Canfor’s products. Japan, too, is a significant customer. Back in the United States, as the Northeast recovers from the effects of Sandy, and construction in the region increases, that should further support lumber prices.

Reflecting these tailwinds and in anticipation of continued strength in the housing market, analysts have been raising estimates for the Canfor’s earnings and EBITDA not only for the just-ended fourth quarter but also for 2013. Over the last 90 days, analysts have boosted their outlook for the company’s profits, sending the consensus shooting higher from a loss of 3 Canadian cents a share to a profit of 17 Canadian cents a share. As impressive as that change in consensus has been, even the new, higher level still falls below the StarMine SmartEstimate, which currently stands at 21 cents a share, giving the company a Predicted Surprise of 19.5%.

It has been strong demand for lumber that has accounted for that expected turnaround from a projected loss to a forecast profit in the fourth quarter. Canfor’s pulp and paper operations – it has a 50.2% stake in Canfor Pulp, a privately-held partnership – aren’t faring as well, however. Pulp and paper and pulp prices haven’t been as robust as lumber, and the pulp company, dealing with restructuring charges one-time payments to unionized workers has announced that it will suspend dividend payments to its shareholders, including Canfor. Nonetheless, it seems that it will be lumber that shapes the company’s financial fortunes for the time being, and analysts aren’t allowing the weakness in the pulp and paper part of the forest products business to dampen their enthusiasm: Canfor currently scores the highest score possible of 100 on the StarMine Analyst Revisions Model (ARM), signaling that those bullish analysts are likely to further increase their earnings estimates. Indeed, the company can also boast a hefty Predicted Surprise of 7.3% for its full-year earnings. Looking ahead into 2014, the trend remains intact, with the analyst earnings consensus standing at C$1.03, while the SmartEstimate is at C$1.09 a share, giving it a 5.6% Predicted Surprise for next year.

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