Mercer Near Rock Bottom: Is This High-Yield Play Set to Soar?

November 14, 2024 at 07:45 AM EST

Lumber yard stacks of lumber

Mercer International (NASDAQ: MERC) is an enticing stock for small-cap investors. It pays a quarterly dividend worth 4.55% in annualized yield and trades at rock-bottom prices in late 2024. The rock bottom is a critical support level that has been in place and retested numerous times for over 15 years, limiting the downside risk. The risk of lower prices is also offset by insider buying, which resumed as shares hit their lows.

Mercer’s insider activity is notable because it is the first in over two years and includes five transactions by four insiders. The transactions were closely spaced in September, aligning with the market’s lowest levels. Insiders who bought include the CEO, CFO, VP, and a director who made two purchases. The purchases are also noteworthy because the insiders already held considerable stock, controlling about 4.0% of the total.

A Sustainable Play on Forestry Products: Mercer International

Mercer International is a diversified play on sustainable forestry. Its products range from timber to byproducts and the energy they can generate. The critical operating segments are pulp and timber products, with pulp running at roughly 75% of the net in 2024. The highlights from 2024 include 6.8% revenue growth in Q3 despite headwinds and unplanned downtime, with EBITDA rising by a leveraged 35% and the net loss shrinking. The outlook for Q4 and 2025 is for the pulp market to remain stable and lumber to improve. Tailwinds may form late in 2025 as the FOMC lowers US interest rates and spurs housing market activity.

The dividend is safe in Q3 2024, but there is risk. The payouts have been erratic in recent years as business conditions fluctuated and the possibility of a cut or suspension is present. Q3 and YTD 2024 produced negative cash flow, and it shows on the balance sheet. Debt is coming down but remains high, and the cash balance is diminishing. This raises the risk of dilution, and the share count is already rising because of share-based compensation. The share count is up 0.5% and is likely to continue rising.

Analysts show some interest despite the risks. MarketBeat.com tracks four reports issued in 2024, a small number but sufficient to provide a modest conviction for the rating and price target. All four pegged the stock at Hold and forecast it to rise by nearly 40% at the consensus target. The most recent was issued in early November and set the low end of the range at $7, or about 15% above the critical support target.

The Outlook for Mercer International Business Stabilizes

The outlook for 2025 isn’t robust but includes two favorable factors for investors. The first is stabilized pricing in the pulp and lumber markets after years of pandemic and supply-chain-driven volatility. The second is modest growth, underpinned by a low-single-digit pulp industry CAGR and improving lumber demand. The result should be sustainable cash flow, continued debt reductions, balance sheet improvement, and improved dividend health.

The price action in Mercer stock is favorable for bottoming. The market hit a new low and rebounded, confirming support at the critical level. The rebound is accompanied by divergence in MACD and stochastic, highlighting the range’s bottom and the likelihood of a price reversal. The question is whether the price reversal will be from down to sideways and leave the market trending in the low end of the range or whether a full reversal is in play. In that scenario, shares of MERC will likely move back to the top of the long-term trading range for a gain of nearly 175%, not counting the dividend.

Mercer International MERC stock chart