One of the cheapest stocks in our Canada All TSX Stock Screener is Canfor Pulp Products Inc (TSE:CFX).
Canfor Pulp Products Inc (Canfor) produces and supplies pulp and paper products in the Americas, Europe, and Asia. The Company’s operations consist of Northern Bleach Softwood Kraft pulp mills (NBSK) and NBSK pulp and paper mill in Canada.
A quick look at Canfor’s share price history over the past twelve months shows that the price is up 21%, but here’s why the company remains undervalued.
The following data is from the company’s latest financial statements, dated June 2017. (All amounts are in Canadian Dollars).
The company’s latest balance sheet shows that Canfor has $92 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has $50 Million in long-term debt. Therefore, Canfor has a net cash position of $42 Million (cash minus debt).
If we consider that Canfor currently has a market cap of $831 Million, when we subtract the net cash totaling $42 Million that equates to an Enterprise Value of $789 Million.
If we move over to the company’s latest income statements we can see that Canfor has $121 Million in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 6.52, or 6.52 times operating earnings. That places Canfor squarely in undervalued territory.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Canfor generated trailing twelve month operating cash flow of $168 Million and had $68 Million in Capex. That equates to $100 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 13%. The company has also spent $11 Million (ttm) buying back shares and $17 Million (ttm) on dividends, providing shareholders with a shareholder yield of 3%.
What seems to get overlooked is that Canfor’s current revenues of $1.140 Billion are the second highest in the last ten years with the one exception being the record high revenues of $1.175 Billion recorded in FY2015. Worth noting however, is that FY2015 free cash flow was $77 Million compared to the $100 Million (ttm) that we see today. That’s an increase of 29%. Also worth noting is that the company’s BVPS of $7.65 (ttm) is an historical high as is its operating cash flow of $168 Million (ttm).
Lastly, its also worth considering Canfor’s annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $502 Million in equity for the quarter ending March 2017 and $502 Million for the quarter ending June 2017. If we divide that number by two we get $502 Million. If we consider that the company has $77 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 15%.
In terms of Canfor’s current valuation, the company is trading on a P/E of 10.9 compared to its 5Y average of 19.7**, a P/S of 0.7 compared to its 5Y average of 5.7**, and a P/B of 1.7 compared to its 5Y average of 1.9**. Canfor has a FCF/EV Yield of 13% and an Acquirer’s Multiple of 6.52, or 6.52 times operating earnings. The company has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 15% and a shareholder yield of 3%. All of which indicates that Canfor is undervalued.
** Morningstar
About The Canada All TSX Stock Screener (CAGR 19.1%)
Over a full eighteen-and-one-half year period from January 2, 1999 to June 16, 2017, the Canada All TSX stock screener generated a total return of 2,536 percent, or a compound growth rate (CAGR) of 19.1 percent per year. This compared favorably with the S&P/TSX Composite TR, which returned a cumulative total of 232 percent, or 4.7 percent compound.
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