Look out above — forestry stocks are growing again
After several lean years, forestry stocks have had a comeback, says a Canadian analyst who likes two Canadians stocks and one from China.
The printed page is supposed to be going the way of the dodo.
The electronic revolution sure hasn’t helped the forestry industry.
And what about the even bigger matter of the mortgage crisis in the United States? With people pushed out of their houses, there wasn’t exactly a flurry of new building going on.
For more than a few years, circumstances were chipping away at Canada’s once-proud timber business.
But now the logs are rolling in a different direction. There are still many uses for pulp and paper products (heck, some people still read newspapers). And lumber is as useful as ever in construction, which in turn has been propped up by a recovering economy.
In fact, says one Canadian analyst, forestry stocks are in the midst of a pretty strong run.
Ms. Jennifer Dowty recommends three growing stocks in the industry to the readers of Investor's Digest of Canada.
Two of them are Canadian, as you might expect, but the third is the owner of vast forest plantations in China.
All those bank notes
Paper and forest products, Ms. Dowty tells us, have had strong momentum for over a year. It began with a rebound in 2009.
In 2010, this sub-sector of the S&P/TSX Composite Index was up 25.6 per cent. This year, it has been up more than 6 per cent thus far.
Armed with these figures, the analyst turns immediately to her three stock picks.
The first is in the paper business, more specifically the security paper business. And most particularly all those bank notes that fill up people’s wallets. It is Fortress Paper(TSX-FTP).
In its three mills — in Quebec, Switzerland and Germany — Fortress also produces visas and passports. It has been printing the Swiss franc since 1979 and also issues paper for the euro and other currencies. In Germany, it produces non-woven wallpaper.
Not least, Fortress is converting its Quebec mill into a “low cost dissolving pulp producer.” Dissolving pulp is used in the making of rayon, the alternative to cotton (which is in high demand in China).
Of the six analysts who cover the stock, four have it as a buy and two others have it as a hold, simply because it has done so well. In 2010 it rose by 371 per cent, going from $9.50 to $44.72. It is now at $55.00, with no dividend. And Ms. Dowty doesn’t think it has stopped yet.
“Fortress was a top-performing stock in 2010 and I believe it will continue to perform well in 2011 due to its attractive growth profile.”
All make it a buy
Across the Pacific (but trading in Toronto) we find Sino-Forest Corp. (TSX-TRE). This company owns and manages forest plantations. It sells standing timber and logs and manufactures engineered wood products.
As Chinese growth continues — to the tune of better than 9 per cent this year, says the International Monetary Fund — the fundamentals look good for this big forestry firm.
Demand for wood fibre is rising in fast-building China. But supplies are tight. And Sino-Forest is a low-cost operator, the analyst adds.
11 analysts cover this stock, Ms. Dowty tells us — and every one of them has it as a buy with an average one-year target price of $28.90.
The stock has been trailing the market a bit so far this year as it trades at $22.15. There is no dividend.
“I anticipate the company will deliver another solid year of steady growth,” concludes this analyst.
Money on trees
And money can grow on trees, Ms. Dowty suggests. While forestry stocks may seem to be growth stocks first and foremost, they can be income stocks as well.
Her case in point is Acadian Timber Corp. (TSX-AND). With 2.4 million acres of timber, this company sends forest products across eastern Canada and the northeastern U.S. It is the second largest timber firm in New Brunswick and Maine.
Its fourth quarter turned up solid earnings on better-than-expected sales, the analyst reports. Confident in the future, the company raised its dividend fourfold. The annual payout jumps from $0.20 a share to $0.825. That’s a tall yield of 8.2 per cent at its current price of $10.25 a share.
Five analysts cover this stock, with three buys, one “neutral” and one “underperform.” Earnings are expected to be modest and the average one-year target price of $10 doesn’t seem to hold out high hopes for growth.
In short, the analyst tells her readers in Investor's Digest of Canada, the stock may appear to be fully valued with a limited upside. But with that high yield it is “an attractive investment for investors seeking income.”
Traditionally, Canada’s resource stocks were summed up with the phrase “rocks and trees.” After trailing behind the rocks for several years, the trees are catching up.
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