West Fraser Timber Co Ltd WFG

Ink Research

[retiredcf]

June 21, 2022

Morning Report: Insider bets on a new dimension for lumber

Forest product stocks have been cut down this year over fears that rising bond yields will destroy housing demand. West Fraser Timber (WFG) is no exception, off 14.9% year-to-date. Despite the drop, it remains up 19.5% over the past year. On April 28th, West Fraser reported Q1 sales of $3.11 billion, up from $2.34 billion in Q1 2021. Earnings came in at $10.25 per diluted share, up from $6.96 in the comparable period. West Fraser closed the acquisition of Norbord on February 1st, 2021, so previous Q1 results do not include a full quarter's contribution. Nevertheless, earnings were also up from $3.13 per diluted share in Q4. West Fraser noted that it has experienced transportation and logistics constraints in North America affecting both its engineered wood products (EWP) and Spruce/Pine/Fir (SPF) segments that have been more challenging than previously expected. However, going forward it expects aging housing stock in key markets to support lumber, plywood, and oriented strand board (OSB) demand as repair and renovation are required.

In addition, over the medium to long term, West Fraser expects growing market penetration of mass timber in industrial and commercial applications to support demand growth. As the BBC reports, concrete is responsible for 4-8% of the world's CO2 emissions. Wood, on the other hand, removes more CO2 from the atmosphere than it adds through manufacture. Investors may be overlooking the carbon storage dimension of wood building products. Moreover, we suspect that the demand for materials to transition to a lower-carbon economy will outlast the Fed's tightening cycle. Meanwhile, a West Fraser officer bought the dip. That leads us to wonder if this selloff might be sowing the seeds of sustainable opportunity.