Lumber producers Canfor and West Fraser and homebuilder PulteGroup remain undervalued.
By Charles Gross | 11-18-16 | 08:00 AM | Email Article

October construction activity rebounded with rising single- and multi-family starts, offsetting weaker September activity. The fourth quarter of 2016 started strong as single-family starts hit a monthly high for 2016, led by a surprise uptick in the U.S. South, despite Hurricane Matthew. As anticipated, October multi-family starts rebounded from a soft September to match July for the strongest month of the year. Despite rain in the U.S. South, favorable weather conditions throughout the country allowed for seasonally strong building activity. October remained in line with our long-term expectations of strong housing demand as millennials move into age groups in which households form rapidly, before housing demand returns to normalized levels of around 1.5 million annual starts.

Charles Gross is an equity analyst for Morningstar.

Within the wood products space, we believe both Canfor and West Fraser remain materially undervalued, trading at 47% and 24% respective discounts to our fair value estimates. Concerns surrounding the resilience of the housing rebound and uncertainty over North American softwood trade have kept share prices depressed. As residential construction grows stronger, high utilization rates will allow relatively low-cost lumber producers to earn attractive profit margins in the coming years.

Homebuilders posted another strong quarterly performance, and leading indicators, such as backlog value and community count, point to continued growth into 2017. Industry backlog value increased 13% year over year, while community count grew 2%. Although we expect all of the homebuilders under our coverage to increase sales and earnings in 2017, we believe PulteGroup is currently the most undervalued homebuilder. We like that PulteGroup’s new CEO remains dedicated to the firm’s capital-friendly value-creation strategy, and we think the company’s renewed focus on entry-level buyers is prudent and should support double-digit growth next year.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Securities mentioned in this article

Ticker

Price($)

Change(%)
Morningstar Rating Morningstar Analyst Report
With Morningstar Analyst reports you can get our expert Buy/Sell opinions on over 3,900 Stock and Funds
Charles Gross does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
Sponsored Links
Sponsor Center
Content Partners