Recently a member of Pat McKeough’s Inner Circleasked him about a Canadian stock whose product is in strong demand, but on a very cyclical basis. Norbord’s oriented strand board (OSB) serves as a plywood substitute in home building. Sales of OSB have been strong in North American and Europe, the stock has soared and the dividend was recently increased.
Pat notes that both the shares and increased dividend depend heavily on the sustained demand that would keep OSB prices high. But the high dividend yield and low p/e ratio may reflect worries that the price has already peaked, he warns.
Q: Pat: I’d like to get your analysis of Norbord (OSB). I’ve held this stock through some ups and downs, and I’m wondering why it has been on such a tear of late. I like the recent dividend increase, but it has been rather cyclical and I’m thinking now may be a good time to exit. Thank you for your response, I’ve lost track of how long I’ve been an IC member and continue to enjoy your sage advice.
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A: NORBORD INC. (symbol OSB on Toronto; www.norbord.com) is one of the world’s largest producers of oriented strand board (OSB). That’s an engineered wood-panel product used as a plywood replacement in home construction and manufacturing. The company can produce more than 8.0 billion square feet of OSB at 17 plants in the U.S. Canada and Europe. Brookfield Asset Management owns 49% of Norbord.
In addition to OSB, the company also produces particleboard, medium density fibreboard and other engineered wood products.
In the three months ended September 1, 2017, Norbord’s revenue rose 27.5%, to $578 million from $453 million a year earlier. (All figures in U.S. dollars.) Earnings jumped 108.6%, to $121 million, or $1.39 a share, from $58 million, or $0.68.
The gains are thanks to continuing OSB demand across North America—the result of sustained growth in new home construction, repair and remodeling. Increased demand from developers of industrial properties also contributed. In the first three quarters of 2017, U.S. housing starts were up 3% compared to the same period last year, with single-family starts 9% higher. The North American North Central OSB benchmark price averaged $409 per thousand square feet in the latest quarter, up 16% from a year earlier. Norbord’s North American output in the second quarter was also up due to increased productivity.
Growth stocks: Dividend yields 5.1% after latest increase
Demand in the company’s U.K. and German markets also remained strong in the latest quarter. Despite the weaker U.K. pound, Norbord’s European panel business improved as prices rose to keep pace with resin prices. The company’s European output was also up due to increased productivity.
Norbord’s long-term debt of $548 million is a reasonable 13.5% of its market cap. It holds cash of $126 million, or $0.08 a share.
The company raised its quarterly dividend by 20% with the December 2017 payment, to $0.60 from $0.50. The shares now yield a healthy 5.1%.
Norbord will maintain (or increase) its attractive dividend rate only as long as OSB prices remain strong. However, prices for the material may have peaked in 2017. That’s mostly because new plants will soon start up to take advantage of the high prices. They’ll lift North America’s overall output by over 12%.
The company’s shares are up 109% over the past two years. Even so, the stock trades at just 13.1 times this year’s forecast earnings of $3.55 U.S. a share. That low p/e ratio, plus its high dividend yield, largely reflects the risk of a decline in OSB prices.
Inner Circle recommendation: Norbord is a hold for aggressive investors only.
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