West Fraser Stock – The Logging Company You Have Been Waiting For
West Fraser shares are running at full speed despite the challenges the company has faced. The Canadian forestry company is benefiting from soaring demand for wood products. That being said, West Fraser (NYSE: WFG) is up 30% this year after an explosive run in 2020.
As a global leader in wood products, West Fraser is well positioned to benefit from the strength of the housing market. The combination of low interest rates and a desire for home ownership has resulted in a rapid increase in the demand for housing. Not to mention the supply chain issue that disrupted supply, resulting in even higher prices.
With lumber prices finally cooling, will West Fraser Timber feel the pinch? Or, can the company continue its extraordinary growth?
Let’s take a closer look at West Fraser stocks and the factors that can affect the stock price.
What is happening with the prices of wood?
If you’ve been following commodity prices over the past year, lumber has been one of the more exciting scenarios. In fact, the National Association of Home Builders shows that the average cost of buying a single-family home has increased by almost $ 30,000 in 2020.
There are several reasons for the price increase.
- The pandemic has caused more people to seek homes. For their part, housing starts rose 17% in June 2020.
- Not only were people looking for new homes, but they were also upgrading their existing homes. In the United States alone, the home improvement market grew by more than 12% in 2020.
- In contrast, suppliers faced downturns in other key business areas such as paper and lumber.
- Labor shortages, forced shutdowns and other costs have also pushed up prices. Several events have led to “supply bottlenecks” which are still being resolved.
With that in mind, 2021 has been a somewhat different story. Lumber futures started the year strong, extending their earnings beyond $ 1,700. But, with lumber prices currently at $ 642, it’s down 90% from its early-year highs.
The US Federal Reserve’s lumber PPI shows a clear picture of how lumber prices have exploded recently. As you can see, the lumber market has not seen such volatility in history.
Why is this important to West Fraser Timber
Well, on the one hand, lumber is one of West Fraser Timber’s biggest products. In addition, lumber is the company’s second largest segment in terms of sales.
The unit generated $ 955 million in the second quarter, compared to $ 607 million in the first quarter. Adjusted EBITDA was $ 994 million. The growth in turnover is due to the higher prices mentioned above. But, management also noted higher manufacturing costs negatively impacting growth. Similarly, rising costs for spruce, pine and fir (SPF) and southern yellow pine (SYP) logs have also limited progress.
In addition to lumber, West Fraser Timber has two other core business lines, including:
- Engineered Wood Products (EWP) and,
- Treated Wood Products (TWP)
EWPs include plywood, MDF, particle board, and LVL. Overall, the EWP division generated $ 1.01 billion, leading the company in terms of profits. The impressive revenue from this segment came as a surprise as it only generated $ 299 million in the first quarter. Profit growth this quarter is over 100%.
In addition, the pulp and paper division made a profit of $ 17 million compared to $ 2 million in the first quarter.
Norbord acquisition pays off
In November 2020, West Fraser Timber announced it was acquiring Norbord, the world’s largest producer of OSB products. Oriented strand board (OSB) is an engineered wood used in residential construction. In addition to OSB boards, the company manufactures other products such as particle board.
A significant portion of the profit growth achieved in the second quarter was attributable to a full quarter with Norbord operational. You may have noticed that West Fraser’s EWP unit increased its profits by over 100% during the quarter. Company CEO Raymond Ferris said this about the deal:
“The transaction gives us additional financial flexibility to seize growth opportunities and better position our business to deliver shareholder value. “
Norbord’s various products complement the West Fraser business model perfectly. The deal is already paying dividends.
West Fraser Timber Financial Position
The impressive second quarter of the forestry company helped to improve the financial positioning of the company. At the end of the quarter, it had $ 3.3 million in cash, an increase of 28% from the previous quarter. West Fraser plans to use the funds for strategic investments to drive growth.
In addition, the company has authorized a share buyback program for more than 6 million shares. During the second quarter, the company noted that it bought just over 3 million shares for an average of $ 74.53 per share.
In search of sustainability
West Fraser Timber’s mission is to produce sustainable wood products. With this in mind, the company plants two seedlings for every tree it harvests. In 2020, they planted 73.9 million seedlings on their land. This summer, West Fraser will plant its two billionth tree.
In addition, the company uses 75% of renewable energy sources. And to minimize waste, they use 99% of the log.
The actions show how committed West Fraser is to protecting the environment and supporting the industry it has been a part of since 1955.
West Fraser Stock Forecasts – Future Outlook
West Fraser Timber had another impressive earnings report filled with growth. Not only has the company increased its revenue for the 5th consecutive quarter, but it is also paying off its debt. The strategic moves put the West Fraser stock in the middle of the real estate boom.
Due to the growth in earnings, the company increased its dividend payout. An increased dividend, share buybacks and an improved financial position improve the outlook for the stock.
With that in mind, West Fraser’s stock price today is $ 83.74. The current price is only 10% off its all-time high of $ 91.53. On top of that, the company’s P / E ratio is only 2.70, showing that West Fraser Timber shares are trading at a value.
All in all, West Fraser Timber has the potential to continue to expand and break into record territory. But, growth will depend on several things. First, the supply chain situation will have to improve to give them the opportunity to improve their margins. And second, demand will also have to remain high for wood products.
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About Pete Johnson
Pete Johnson is a seasoned financial writer and content creator specializing in equity and derivatives research. He has over ten years of personal investment experience. Rummaging through 10-K forms and finding hidden treasures is his favorite pastime. When Pete isn’t doing stock research or writing, you may find him enjoying the outdoors or sweating while exercising.