Stock Analysis & Ideas

While Timber Prices Lumber Along, this Analyst is Bullish on 3 Industry Players

The volatility in lumber prices was on display earlier this week as according to a Markets Insider report, having dropped more than 6% to $829 per 1,000 board feet, hitting a new low for the commodity this year. According to the report, these prices are down 39% from a high of $1,357 per thousand board feet in March and have more than halved from their May 2021 high of $1,733 per thousand board feet.

The downslide in lumber prices has been due in part to a fall in demand along with rising interest rates. This is indicated by the 30-year fixed mortgage rates that have climbed above 5%, making buying a home more costly. In addition, there has also been a slowdown in do-it-yourself home renovations, leading to a drop in lumber demand.

However, will lumber prices continue to fall? Per data from Statista, that is unlikely. The Markets Insider report stated that the number of new homes built from 2010 to 2019 was less than 50% that were built between the time period of 2000 to 2009, indicating that there could be a shortage of new homes being constructed.  

In this scenario, using the TipRanks database, we looked at some lumber stocks that Wall Street analysts are still bullish about.

West Fraser Timber Co. (NYSE: WFG)

Canadian-based West Fraser is a wood products company, that has more than sixty facilities in Canada, the U.S., the United Kingdom, and Europe. The company’s product portfolio includes pulp, newsprint, wood chips, lumber, engineered wood products, other residuals, and renewable energy.

Shares of WFG have not fared well in the past month and are down 12.7% even after its strong Q4 earnings. In Q4, the lumber company’s revenues soared 57.5% year-over-year to $2.04 billion. Diluted earnings came in at $3.13 per share versus $4.09 per share in the same period last year.

This fiscal performance came amid difficult challenges for the company. As Ray Ferris, West Fraser’s President & CEO commented on the challenges in its Q4 press release, “In particular, we managed the complexities of significant transportation and mill disruptions in the face of unprecedented flooding in the B.C. Interior and Vancouver Lower Mainland, which severely disrupted transportation and logistics and the flow to markets of our finished products from Western Canada.”

As a result, RBC Capital analyst Paul Quinn remains bullish on the stock with a Buy rating and a price target of $125 implying upside potential of 60.3% to early morning trading levels on Thursday. The analyst has cited WFG’s “strong levels of profitability, strong operational performance, a solid balance sheet, and an emphasis on returning capital to shareholders,” as reason to be upbeat about the stock.

However, Quinn also cautioned that WFG remains vulnerable to the cyclical nature of lumber prices.

WFG also scores a Buy from the rest of the analysts on the Street with a Strong Buy consensus rating based on five unanimous Buys. The average WFG stock forecast is $123.49, implying an upside potential of 58.3% from early morning trading levels on Thursday.

Weyerhauser Co. (NYSE: WY)

Weyerhauser is a large, private owner of timberlands that began its operations in 1900 and owns or controls around 11 million acres of timberlands in the U.S. The company also manages additional timberlands in Canada under long-term licenses.

WY is also a large manufacturer of wood products in North America. The company also operates as a real estate investment trust (REIT) that allows it to own and operate real estate that produces income.

The lumber company generated revenues of $10.2 billion in 2021.

RBC Capital analyst Paul Quinn is upbeat about the stock with a Buy rating and a Street-high price target of $45, implying an upside potential of 12.1% from early morning trading levels on Thursday. The analyst’s price target is based on a blended EV-to-EBITDA multiple of 13.5 times to Quinn’s 2022 EBITDA forecast of $4.1 billion.

The analyst is positive about “Weyerhaeuser’s significant exposure to less cyclical timberland cash flows and favorable REIT tax status.”

Other analysts on the Street are also bullish about WY with a Strong Buy consensus rating based on four Buys and one Hold. The average WY stock forecast is $42.60, implying an upside potential of 6.1% from early morning trading levels on Thursday.

Canfor Corp. (OTC: CFPZF)

Canfor is a forest products company headquartered in Vancouver, British Columbia (BC). The company primarily produces “softwood lumber and also owns a 54.8% interest in Canfor Pulp Products.” Canfor Pulp Products is a large producer of kraft paper and Northern Bleached Softwood Kraft Pulp.

Canfor has interests in “BC, Alberta, North and South Carolina, Alabama, Georgia, Mississippi, Arkansas and Louisiana, as well as in Sweden with 70% interest in Vida Group.”

The company is currently going through a tough time as it announced late last month that it was reducing operating schedules at its sawmills in Western Canada effective from April 4 for a minimum of four weeks due to supply chain constraints.

Don Kayne, President and CEO, Canfor commented, “We are experiencing extreme supply chain challenges that are significantly impacting our operations and it has become imperative to reduce operating schedules to address our unsustainable inventory levels.”

This reduced production schedule is expected to impact Canfor’s production capacity “by a minimum of 100 million board feet.”

Shares of Canfor have taken a beating in the past month as the stock has dropped 10.8%. Amid such supply constraints and lowered lumber prices, how is Canfor positioned?

RBC Capital analyst Paul Quinn continues to be optimistic with a Buy rating and a price target of $31.61, implying an upside potential of 66.8% to early morning trading levels on Thursday. The analyst expects lumber companies like Canfor “to generate strong FCF [free cash flows] from lumber operations.”

Quinn believes that the company’s capacity could be impacted by the “supply-demand balance in 2022, the impact of new supply could also be mitigated by reduced offshore imports.”

However, the analyst also cautioned that for companies like Canfor that have lumber interests in BC, “BC Interior lumber production will continue to decline as the available timber supply continues to be reduced through government intervention (e.g. Old Growth, Caribou Protection Program, etc.).”

Besides Quinn, other analysts on the Street are also upbeat about Canfor with a Strong Buy consensus rating based on four unanimous Buys. The average Canfor stock forecast is $34.25, implying an upside potential of 79.4% from early morning trading levels on Thursday.

Bottom Line

It is evident from this list that while lumber prices may continue to be volatile this year, the above lumber stocks still offer investors significant upside potential over the next 12 months.

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