Pacific Trader: Forest products stocks have soared, but CanWel Building Materials may have room yet to grow

The distribution company is capitalizing on the housing boom to improve its market position.

Credit: CanWel Building Materials Group

Already diversified beyond wood products, CanWel is on the hunt for new acquisitions

The distribution company is capitalizing on the housing boom to improve its market position

The stock: If you’ve made any home improvements lately, you’ll know that the price of lumber has gone through the roof, largely thanks to the pandemic-era obsession with all things domestic. Internet memes are circulating about the lumber-to-bitcoin exchange rate and street-corner sales of wood fibre in dime bags. All of B.C.’s forest company stocks have benefited, but there’s reason to believe that CanWel Building Materials Group (TSX:CWX), a Vancouver-based manufacturer and distributor of specialty wood and other home-building products, still has room to go higher.

The drivers: What started as a joint distribution venture for local forest companies Canfor Corp. (TSX:CFP) and Weldwood of Canada (now part of West Fraser Timber Co. [TSX:WFG]) posted unaudited earnings of $60 million in the first quarter, beating the street’s $44-million consensus estimate by several board feet. Though CanWel is trading at a higher multiple than it has historically, its price-to-earnings ratio is still a modest 12.6, and its dividend yield is nearly 5 percent.

Management, led by CEO and Futura Corp. boss Amar Doman, hasn’t just been sitting back enjoying the show. CanWel has used the share-price appreciation to retire and refinance debt and to build a war chest for acquisitions. On April 21, it announced that it was issuing 7.5 million new shares in a bought deal, a kind of bulk equity sale, to a syndicate of institutions led by Stifel GMP and National Bank Financial (TSX:NA) at $10 apiece. Given that the stock’s been trading around $9.70 in recent days, retail investors have an opportunity to get in for less than the pros. The risk in this scenario is that the good times are short-lived and CanWel ends up overpaying for its new bolt-ons.

Word on the street: Whatever happens to housing in the medium term, National Bank Financial analyst Zachary Evershed said in a note to clients, CWX is coming out of the pandemic “fundamentally stronger, in our view, and better positioned to fund M&A without relying on external funds.”

Coming and going: Burnaby-based fuel-cell pioneer and recent market darling Ballard Power Systems (TSX:BLDP) gave up a chunk of its recent gains on Tuesday, falling nearly 20 percent following a big earnings miss. The company reported first-quarter revenue of US$17.6 million, well back of the consensus expectation of US$25.5 million. We’ll see whether this is a bump in the road or a full-on correction for the hydrogen subsector as other stocks, including local upstart Loop Energy (TSX:LPEN), also lost steam.