West Fraser stock is firing on all cylinders despite the challenges the company has faced. The Canadian-based forestry company is taking advantage of the skyrocketing demand for wood products. With that being said, West Fraser (NYSE: WFG) is up 30% this year after an explosive run in 2020.

Being a leader in global wood products, West Fraser is well-positioned to benefit from the strong housing market. A combination of low interest rates and a desire for homeownership led to a rapid increase in demand for housing. Not to mention supply chain issue has disrupted the supply side, leading to even higher prices.

With lumber prices finally cooling off, will West Fraser Timber feel the effects? Or, can the company continue its extraordinary growth?

Let’s take a closer look at West Fraser stock and what factors can impact the share price.

What’s Going on With Lumber Prices?

If you’ve been following commodity prices this past year, lumber has been one of the most exciting storylines. In fact, the National Association of Home Builders shows the average cost to buy a single-family home increased by almost $30,000 in 2020.

There are a few reasons for the jump in prices.

1. The pandemic caused more individuals to look for houses. In turn, housing starts advanced 17% in June 2020.
2. Not only were people looking for new houses, but they were also improving their existing ones. In the U.S alone, the home improvement market increased by over 12% in 2020.
3. In contrast, suppliers have dealt with slowdowns in other key business areas such as paper and timber.
4. Labor shortages, forced shutdowns, and other costs have also led to higher prices. Several events have led to “supply bottlenecks” that are still being worked out.

With this in mind, 2021 has been somewhat of a different story. Lumber futures started the year off strong, extending its gains past $1,700. But, with lumber prices currently sitting at $642, it’s down 90% from its highs earlier this year.

Source: https://fred.stlouisfed.org/series/WPU081

The Federal Reserve Economic Data lumber PPI shows a clear picture of how lumber prices have exploded recently. As you can see, the lumber market hasn’t seen volatility like this throughout history.

Why Does This Matter for West Fraser Timber

Well, for one, lumber is one of West Fraser Timber’s biggest products. Furthermore, Lumber is the company’s second most significant segment in terms of sales.

The unit generated $955 million in the second quarter, compared to $607 million in the first quarter. Adjusted EBITDA came in at $994 million. The top-line growth was due to the previously mentioned higher prices. But, management also noted higher manufacturing costs negatively impacting the growth. On the same note, increasing spruce, pine, and fir (SPF) and southern yellow pine (SYP) log costs also limited the progress.

On top of lumber, West Fraser Timber has two other vital business segments, including:

• Engineered Wood Products (EWP) and,
• Treated Wood Products (TWP)

EWPs include plywood, MDF, particleboard, and LVL. Overall, the EWP division generated $1.01 billion, leading the company in terms of earnings. The impressive revenues in this segment came as a surprise as it only generated $299 million in Q1.The earnings growth this quarter is over 100%.

Additionally, the pulp and paper division produced $17 million in earnings vs. $2 million in Q1.

Norbord Acquisition Paying Off

In November 2020, West Fraser Timber announced it was buying out Norbord, the world’s largest producer of OSB products. Oriented Strand Board (OSB) is an engineered wood used in home building. On top of OSB, the company makes other products such as particleboard.

A considerable portion of the earnings growth achieved in Q2 is thanks to having a full quarter with Norbord operational. You may have noticed West Fraser’s EWP unit growing earnings over 100% in the quarter. The company’s CEO Raymond Ferris had this to say about the deal:

“The transaction gives us additional financial flexibility to pursue growth opportunities, and better positions our company to deliver value to shareholders.”

Norbord’s various products complement West Fraser’s business model perfectly. The deal is already paying dividends.

West Fraser Timber Financial Position

The forestry company’s impressive second quarter helped boost the company’s financial positioning. At the end of the quarter, it had $3.3 million available in liquidity, increasing 28% from the previous quarter. West Fraser is planning on using the funds for strategic investments to fuel growth.

In addition, the company allowed a share buyback program for over 6 million shares. During the second quarter, the company noted that it purchased just over 3 million shares for an average of $74.53 per share.

Striving for Sustainability

West Fraser Timber is on a mission to produce sustainable wood products. With that in mind, the company plants two seedlings for every tree they harvest. In 2020, they planted 73.9 million seedlings across their land. This summer, West Fraser will plant its two billionth tree.

Not only that, the company uses 75% renewable energy sources. And to minimize waste, they utilize 99% of the log.

The actions show how committed West Fraser is to saving the environment and supporting the industry it’s been a part of since 1955.

West Fraser Stock Forecast – Outlook Going Forward

West Fraser Timber had another impressive earnings report filled with growth. Not only has the company increased its revenue for the 5th straight quarter, but it’s also paying down debt. The strategic moves place West Fraser stock in the middle of the housing boom.

As a result of the earnings growth, the company has increased its dividend payout. An increased dividend, stock buybacks, and an improving financial condition are enhancing the stock’s outlook.

With that in mind, West Fraser’s stock price today is $83.74. The current price is only 10% off its all-time high price of $91.53. On top of this, the company’s P/E ratio is only 2.70, showing West Fraser Timber stock is trading at a value.

All things considered, West Fraser Timber has the potential to continue its expansion and break out into all-time high territory. But, the growth will be dependent on a few things. First, the supply chain situation will need to improve to give them the chance to improve margins. And second, demand will also need to remain elevated for wood products.

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