A Bullish Penny Stock that Could Run Higher Throughout 2013

Since 2008, the Canadian lumber industry has been shrouded with weak demand. But, all that could change. Tied to the sharp and long-lasting downturn in U.S. housing, lumber, medium-density fiberboard, and particleboard manufacturers are expected to enjoy a substantial recovery in earnings in 2013. The outlook for oriented strand board (OSB), used in flooring and roofing in residential and commercial construction, is even brighter than that of lumber. (Source: “Energy, Lumber Prices Push Scotiabank Commodity Index Higher in August,” ctvnews.ca, September 22, 2011.)
Further, the destructive force of Hurricane Sandy is also expected to help boost recovery in Canada’s forest products industry in 2013 as communities in the New York City area and New Jersey rebuild. Analysts expect the impact on demand of wood consumption is probably going to materialize in the second and third quarters of 2013 with the rebuilding efforts. (Source: The Canadian Press, “Canadian Lumber Industry to Get Boost from U.S. Hurricane,” Maclean’s.ca, November 2, 2012.)
After being battered by the deep recession and financial crisis, the Canadian industry is seeing positive signs from the gradual improvement in U.S. housing starts.
Even still, during the years that new home builds in the U.S. were stagnant, Canadian producers turned their attention to China, and have made significant inroads. Lumber exports to China rose 103% in 2011 over the previous year, and now represent 23% of total softwood shipments. (Source: The Canadian Press, “Softwood Lumber: Canada and U.S. Agree to Extend Agreement.” huffingtonpost.ca, January 23, 2012.)

Chart courtesy of www.StockCharts.com

Looking at the three-year U.S. Lumber index, we can see that the industry has been bullish since November 2011. Further, it recently broke through a three-year resistance level.
Taking advantage of the strong run in lumber sales is Canadian-based Ainsworth Lumber Co. Ltd. (TSX/ANS). The penny stock manufactures and markets engineered wood products in North America and Asia. Its products are used for commercial/industrial roofing, sidewalks, curbs, slabs and non-structural concrete, flooring, beams, headers, recreational vehicles sheathing, and residential sheathing. The penny stock serves dealers, builders, original equipment manufacturers, homeowners, specifiers, wholesale distributors, building materials professionals, and other integrated forest products companies.
Ainsworth has a market cap of $327.0 million, $91.9 million in cash, and levered free cash flow of $4.2 million.
On October 31, the penny stock announced that third-quarter revenue was up 61% year-over-year at $115.6 million. Ainsworth recorded net income from continuing operations of $32.6 million, or $0.32 per share, in the third quarter of 2012, compared to a net loss of $58.9 million, or $0.59 per share, in the third quarter of 2011.
Year-to-date revenue was up 30% at $291.2 million. Net income from continuing operations increased from $5.9 million, or $0.05 per share, in the first nine months of 2011 to $22.0 million, or $0.22 per share, in the first nine months of 2012.
Subsequent to the quarter end, Ainsworth announced a comprehensive refinancing plan; one that will significantly improve the penny stock’s financial position. The plan is expected to result in a 30% reduction in total debt, lower borrowing costs, and the extension of the company’s maturity profile.
As part of the refinancing plan, the penny stock intends to raise gross proceeds of $175.0 million through the issue of common shares. The net proceeds will be used to repay in full Ainsworth’s outstanding senior secured term loan, due June 2014, and 11% senior unsecured notes due July 2015, which comprise all of the penny stock’s existing indebtedness.

 Chart courtesy of www.StockCharts.com

Like the greater U.S. lumber index, Ainsworth has been trending steadily higher all year. The penny stock’s share price has been even more bullish since the 50-day moving average crossed over the 200-day moving average in early July. During the summer and autumn months, interest in the penny stock increased with a boost in volume.
Ainsworth is a diversified, profitable, financially robust company, with growing revenues and a solid outlook. After years of downward pressure on the lumber industry, October new home sales increased 15% month-over-month to a seasonally adjusted annual rate of 872,000. New housing starts across the U.S. are 34.8% higher than in September 2011. (Source: U.S. Department of Housing and Urban Development, and U.S. Department of Commerce, “New Residential Construction in September 2012,” U.S. Census Bureau News Joint Release, October 17, 2012.)
Buoyed by strong quarterly growth, and hopes of a rebound, Ainsworth’s share price has been bullish. While 2013 is expected to be a strong year for the lumber industry and new home builds, this could change quickly. But, with new refinancing in place, Ainsworth’s financial position has been significantly strengthened.