Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
No-moat-rated Canfor CFP reported first-quarter results that were largely in line with our expectations. Net sales rose 2.5% year over year as gains in the lumber segment were offset by lower sales in the pulp and paper segment. The firm reported a C$28.5 million loss in the quarter, an improvement from the C$85.8 million loss in the first quarter a year ago. Canfor’s lumber business benefited from higher prices and reported a C$26 million loss in the quarter, which was also an increase from a year ago.
That said, heightened economic uncertainty has raised concerns of a slowdown in building, which will likely loom over the lumber industry for the remainder of the year. While Canfor has reduced its exposure to Canada and potential tariffs in recent years, lumber markets rely on new residential construction and DIY projects that we expect will remain constrained for much of the year. As such, we have maintained our C$20 fair value estimate.
After the United States initiated new tariffs on lumber products imported from Canada on March 4, they were quickly removed only two days later. The US currently has a 10% blanket tariff on products from Canada, but lumber and wood products are excluded. That said, lumber imported to the US is still subject to countervailing duties, which is approximately 16.58% for Canfor, slightly less than the 14.54% paid by most lumber importers.
Countervailing duties are reviewed annually, and the preliminary results for the annual review points to a substantial increase in duties this year, which could be as high as 45% for Canfor. This could be a substantial headwind for Canfor, but the company has worked for years now to decrease its footprint in Canada and expand its operations in the US south. Less than 20% of Canfor’s total sales are exposed to countervailing duties and tariffs, and we expect this number will continue to decline as Canfor shifts its production away from Canada.
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