Key insights
- Raymond James identifies multi-cycle lows in lumber stock valuations, suggesting a late-stage downcycle. Structural supply cuts in Canada and Europe, coupled with a forecast for tightening fundamentals over the next two years, indicate potential upside. A decline in mortgage rates could further boost demand. The firm favors companies with production outside Canada, highlighting Interfor, West Fraser, and Canfor for their leverage and diversification.
Investing.com -- Raymond James said lumber stock valuations have reached multi-cycle lows at approximately 0.5 price-to-book value after 15 consecutive quarters of housing-driven weakness. The firm said North American lumber markets are approaching the late stages of the current downcycle.
The investment bank pointed to year-to-date structural supply reductions in Canada and the Eurozone as factors supporting its outlook. Raymond James said its mid-cycle analysis suggests multiples of current market cap return potential based on current enterprise values.
The firm noted that lumber equities have moved inversely to both energy equities on the Toronto Stock Exchange and 10-year Treasury yields since the Iran conflict began.
Raymond James said it favors commodity building materials companies with production outside Canada. The firm highlighted Interfor as offering the most exposure to a housing recovery due to operational and financial leverage. For large-cap investors, the firm pointed to West Fraser's geographic and product diversification and Canfor's structural margin improvement.
The firm maintains Strong Buy ratings on building products distributors ADENTRA and Doman Building Materials, citing seasonality and merger and acquisition possibilities. Raymond James said these stocks show approximately 25% upside to target prices and roughly 90% average upside to mid-cycle valuations.
The firm's supply-demand model forecasts tightening fundamentals over the next two years driven by declining North American lumber production and relatively flat U.S. housing and renovation demand. Raymond James said an aggregated 1.9 billion board feet reduction in European and Canadian lumber shipments should support annual lumber price increases.
The firm said a sustained decline in 30-year fixed mortgage rates from 6.5% to 5.5% could unlock roughly 3 billion board feet of incremental lumber demand. Raymond James noted that Canfor's and West Fraser's balance sheets have remained largely intact throughout the current downcycle.