Credit Suisse In reaction to recent share price depreciation, Credit Suisse’s Andrew Kuske upgraded West Fraser Timber Co. Ltd. to “outperform” from “neutral” on Tuesday.
“From the summer stock peaks (July 20th), West Fraser Timber Co. Ltd. (WFG) shares delivered a roughly 25-per-cent negative capital return versus 9 per cent and 1% per cent for the S&P/ TSX Composite and the S&P 500, respectively,” he said. “With sufficient total potential return to a US$95 (was US$100) target price, we upgrade WFG to Outperform from Neutral.
“We fully acknowledge some housing market headwinds; however, the rate debate, housing market trends in H2 2023 and industry actions collectively provide an interesting risk-reward for WFG’s shares, in our view. Continued deceleration of housing market trends, weaker lumber prices and, in some cases, higher underlying cost structures (for now) are motivating a collection of curtailments. Such actions will help re-balance parts of the market and are broadly supportive of our upgrade to Outperform thematically.”
Mr. Kuske made the move despite lowering his 2022 and 2023 earnings per share projections to US$20.41 and US$3.65 from US$20.77 and US$5.97, respectively, based on “a series of operational and forecast changes.”
His US$95 target, down from US$100, is below the average on the Street of US$106.67.
“Forest product stocks are notoriously cyclical and often with rather accentuated moves – in both directions; the ‘perfect timing’ is typically elusive,” he said. “Industry curtailments (~400Mbf of capacity) and market structure should be helpful this cycle. Rate moves in H2 2023 (potentially declining) along with the current housing price compression bode well for affordability and return to improved prices and solid wood demand.”
“We believe West Fraser has an enviable position in both lumber and OSB markets, however, pricing and housing dynamics are not currently supportive.”