In recent months, we’ve written about the challenges facing Canada’s manufacturing sector, particularly among exporters. One of the reasons we’re focused on this area is because the Bank of Canada believes a rebound in exports will help the country’s economy shift away from its dependence on debt-burdened consumers.

But Canada’s export-oriented manufacturers were decimated during the downturn, as well as, until recently, by the strong Canadian dollar. Indeed, the country’s manufacturing shipments are still 10 percent below their pre-Global Financial Crisis levels. While a high exchange rate helped enhance returns for our Canadian Edge Portfolios, it was having a deleterious effect on exporters competing in an increasingly global marketplace.

The loonie’s persistent weakness during much of the 1980s and 1990s actually helped insulate the country’s manufacturers from the sort of deindustrialization that was underway throughout the developed world. In fact, in a recent research report, economists with CIBC World Markets observed that during the currency’s long slide from USD0.88 in late 1991 to USD0.63 in early 2002, this sector’s share of gross domestic product (GDP) actually increased.

But as the loonie climbed above parity with the US dollar over the past decade, manufacturing’s share of GDP declined by four percentage points, to 12 percent. By comparison, US manufacturers experienced a similar erosion during the 1970s and 1980s, with their share of GDP relatively stable since then, at around 13 percent.

Meanwhile, during the past decade, the number of Canadian manufacturing firms fell by 20 percent, even as the number of companies in other sectors of the country’s economy rose by 10 percent. In particular, the number of larger firms, defined as companies with 500 or more employees, declined the most, by more than 30 percent from 2006 through 2012. Bigger companies tend to be more export-oriented, so the relatively high exchange rate hit them the hardest. By contrast, the number of firms with fewer than 50 employees dropped by roughly 12 percent over that same period.

As we’ve noted in previous articles, one of the ways in which Canadian manufacturers have lagged their peers in other first-world countries has been in terms of productivity, in part because of lower investment in machinery and equipment. But CIBC says that output per worker has climbed by more than 9 percent since 2009, which is double the pace of the economy’s productivity as a whole.

In this leaner and meaner business environment, CIBC looked to see which areas of the manufacturing sector have adapted best to these macro factors and are, therefore, poised to outperform. Among their criteria were industries that have experienced productivity growth since the downturn, while operating in markets where foreign competitors face a disadvantage due to the weaker exchange rate.

So which subsector is tops? According to CIBC’s ranking, it’s the wood products industry, which has seen strong growth in productivity during the recovery and boasts a nearly 50 percent export penetration of the US market. The US absorbs about three-quarters of Canada’s exports, so Canadian manufacturers remain very much dependent on cross-border demand. The primary metals, machinery, and aerospace industries also garnered top rankings.

Interestingly, the relative fortune of Canada’s forestry products industry has also caught the attention of bond-rating agency Moody’s Investors Service. The credit rater notes that the Canadian dollar’s decline has been a boon for the industry because most of its products are priced in US dollars. The loonie currently trades near USD0.9063, down about 14.5 percent from this cycle’s high in mid-2011.

Of course, certain currency-related expenses will also partially weigh on the industry’s performance, including higher prices for fuel, which is priced in US dollars, as well as financing.

Within the forestry space, Moody’s highlights pulp and wood products companies as being the biggest potential winners, with dollar-denominated expenses for these firms limited to chemicals used during the pulping process as well as freight fuel.

For pulp manufacturers, the weak exchange rate means these companies now occupy the low end of the global production cost-curve, and the higher margins that result afford greater operational flexibility. Meanwhile the makers of wood products, including lumber, plywood and other materials, not only benefit from substantial exposure to the US market, but their currency advantage means they’ll also face less competition from US exporters on the domestic front.

There are currently two firms in the Canadian Edge coverage universe with direct exposure to these trends: Acadian Timber Corp (TSX: ADN, OTC: ACAZF) and Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF). Acadian is a constituent of our Aggressive Portfolio and is a buy below USD13, while Canfor is listed in the Natural Resources section of our How They Rate tables and is a buy below USD11.

Portfolio Update

Leading general contractor Bird Construction Inc (TSX: BDT, OTC: BIRDF) operates from 11 offices across Canada, with work split almost evenly between the heavy industrial market as well as the industrial, commercial and institutional (ICI) markets.

For the fourth quarter, Bird reported net income of CAD5.7 million, down 77 percent year over year. Revenue came in at CAD363.7 million, a decline of 13 percent from a year ago.

Fortunately, Bird’s profits are expected to rebound sharply this year, as revenue shifts toward higher-margin industrial work. During the fourth quarter, the company announced CAD400 million in new contracts, with many of the projects concentrated in Canada’s energy-rich province of Alberta.

At year-end, Bird carried a record project backlog totaling CAD1.27 billion, up 18 percent from the prior year. With this backlog, as well as the fact that the company is now moving past a troubled fixed-price project for which it faced a number of execution issues, management believes earnings will return to a level that supports the dividend as well as future growth.

Last year, for instance, Bird paid out CAD31.85 million in dividends on CAD12.1 million in net income. But analysts expect adjusted net income will increase to CAD37.2 million this year, which will more than cover the dividend.

Although Bird failed to cover its payout last year, the CAD602 million company still ended the year with CAD150.1 million in cash and cash equivalents on its balance sheet. Bird carries just CAD39.4 million in total debt.

Despite the modest decline in sales, Bird’s fourth-quarter revenue beat analyst estimates by 1.5 percent, the third consecutive quarter in which the company exceeded forecasts for its top line. In fact, the company has surpassed Bay Street’s revenue projections in seven of the past eight quarters.

Bird’s performance on the earnings front, however, has been checkered. Although the company fell short of forecasts for earnings per share by 14.6 percent, this was a significantly narrower miss than the previous three quarters, for which the company disappointed by an average of 63.2 percent.

On Bay Street, the mix of analyst sentiment has finally turned bullish again, with five “buys” and two “holds.” The consensus 12-month target price is CAD14.92, which suggests potential appreciation of 5.1 percent above the current share price.

Immediately after the company’s earnings report, Raymond James upped its rating to “outperform,” equivalent to a “buy,” from “market perform,” or “hold.” It also increased its 12-month target price to CAD16.00 from CAD12.00.

More recently, Dundee Securities Corp raised its rating to “buy” from “neutral,” or “hold,” after Bird reported in late March that it had been awarded $300 million in new contracts for civil and building construction projects. The analyst also bumped his 12-month target price to CAD15.00 from CAD13.00.

For full-year 2014, analysts forecast that revenue will rise 5 percent, to CAD1.4 billion. That’s modest growth, but a welcome respite from last year’s performance, when revenue declined by 8 percent year over year. Expectations for 2015 are similarly muted, with sales projected to rise 5 percent, to CAD1.47 billion.

However, consensus estimates call for profits to come roaring back from last year’s disappointment, when adjusted earnings per share fell by 75 percent year over year. For full-year 2014, by contrast, adjusted earnings per share are expected to jump 162 percent, to CAD0.89. And at least some of this momentum will be sustained through 2015, with adjusted EPS rising 29 percent, to CAD1.15.

Over the past seven months, Bird’s stock has climbed 26.7 percent from a trailing-year low of CAD11.20 in late August. At recent prices, the shares trade just 6.3 percent below their all-time high, set back in May 2012.

Bird’s dividend has grown 4.8 percent annually over the past three years. The monthly payout is currently CAD0.0633, for a total annual payout of nearly CAD0.76. The stock presently yields 5.4 percent. Bird Construction is a buy below USD14.50 in the Conservative Portfolio.