Interfor sees Lumber Price move up slightly;prepares for an average Q3

  This is the pattern that Interfor is hoping for in lumber prices.Lumber was selling at $650 per million board feet in November 2020.It moved up to $1000 per million board feet in March 2021 and even higher in June to $1500 per million board feet.Consequently Q1 sales and earnings were fantastic.So were Q2 results.But the North American lumber price has come down since June 30 which is the end of Q2. At the bottom it was only$450 per million board feet.However this blog estimated that the average price for lumber in Q2 was about $1100 per Mbf and then estimated that the average price for Q3 which ends on September30 would be roughly $850-$900 per Mbf. This is only a 22-24% reduction from the average Q2 price.Of course, this is only an estimate but considered a good approximation.As lumber prices in July were above the average price although lumber prices now are well below the average price at $625-$650 per Mbf.

     The Lumber Price Cycle

Sales and profits in 2020 were at a 4 year high as lumber prices were starting to rise.But with the pandemic restricting demand for lumber in 2020 prices really soared in early 2021.And prices moved fairly slowly down to their present level.Some analysts think the price will pick up in Q4 but this blog remains cautious.Although the low price in the cycle appears to be $450 and it has moved up from the bottom to it's present level around $650.

   Interfor has had poor financial results for 3-4 years and it's stock price has stayed in a range from $7-$12 per share.For example, in September2020 the stock price was about$10.And IFP increased the debt on it's balance sheet.But the tremenduous runup in the lumber price in Q4 of 2020 moved the stock price up to a high of almost $35 in May,2021.While Interfor decreased their debt/equity ratio to 46%.Since then it has settled down to the $31-$32 price range.Some market analysts are expecting quite lower sales and earnings for Q3.This blog is not in that camp .

  The New Improved Interfor   

     Scotiaitrade reports  that IFP made $280 million of net income (earnings) in 2020.They also show that the price/earnings ratio (P/E) is a paltry 2.3 times earnings.This is well below the average P/E ratio for the TSX which is about 15 times.In addition,this year IFP has already earned $680 million in the first 6 months.And Q3 looks like  it will be only a little below Q2 levels.Furthermore IFP made excellent investments when the cycle was high.They acquired 4 sawmills in U.S.A.;3in the American south (probably softwood mills) and one in Oregon (probably a hardwood mill)Now Interfor tells shareholders that 77% of it's production will come from U.S.A. and so avoid lumber duties.

     IFP'S third quarter will see Canadian production below that of Q2.But one of their American sawmills has already contributed to total production in Q2 and will again in Q3.In fact, it is likely that all 4 of their new sawmills will contribute to some degree.And consequently Q3 production may be 10-20% higher than in Q2.This will help to offset the lower lumber price.And as calculated above the average price for the quarter will only be 20-22% lower than the average Q2 price.This blog expects net income to be in a range of $375-$425 million and e.p.s. to be between $3.75-$4.00.If true then 9 months earnings will be about$1,050 million. C.I.B.C. has a target price range of $40 for yearend.But if sales and earnings come in as calculated then annual net income will be no less than $1.3 billion and annual e.p.s will be above $15 a share.Q3 sales and earnings are fairly certain but Q4 is still relatively unknown.That aside this blog sees C.I.B.C 's price estimate as low and even with the vagaries of the lumber price cycle $45-$48 a share is not impossible by Q1 of 2022.      

                         

 Dale McIntyre (M.Sc.) Economics is a freelance writer that works closely with Zacks Research Co.   https://www.zacks.com/