One area of the economy that has been “hot” has been home building and home renovations. And, accordingly, lumber companies have done well, notes Shawn Allen, contributing editor to Internet Wealth Builder.
Given that Internet Wealth Daily does not have a forestry stock on its recommended list, I have taken a look at one of Canada’s largest forestry companies and found that it is worth considering, especially for those wanting exposure to this sector of the economy.
West Fraser Timber Co. Ltd. (WFG) has lumber operations in 13 locations in western Canada and panel operations in eight locations. It has operations in 21 locations in the southern U.S. It also has five pulp mill operations in Alberta and B.C.
In 2019, 69% of revenue was from lumber, 12% from panels, and 19% from pulp and paper. About 58% of non-current assets are located in Canada and 42% in the U.S.
West Fraser Timber has been a volatile stock over the past decade. It’s not for the faint of heart. Earnings were very strong in the first three quarters of 2020 as timber and panel prices improved. But that followed 2019, which had losses in each quarter.
The outlook is very positive given that lumber and panel prices are at or near record highs and are generally expected to remain elevated due to strong U.S. home-building and renovation activity.
West Fraser is a well-managed company that prides itself on being a low-cost producer and on its environment efforts. Its stock price is reasonably attractive, particularly if lumber prices remain high. But it competes in a tough and cyclical business.
On February 1, West Fraser closed its massive all-stock acquisition of Norbord — the world's largest Oriented Strand Board (panel) producer. Norbord’s earnings had been very strong in 2020 after a weak 2019.
Continuing West Fraser shareholders will own 56% of the combined company and former Norbord shareholders will own 44%. The new and much larger West Fraser Timber has commenced trading on the New York Stock Exchange under the symbol WFG and its trading symbol in Toronto has been changed from WFT to WFG.
Our recommendation is to buy — but be aware that this is a cyclical company. The thesis in buying is an expectation that lumber prices will remain strong.