Credit Suisse analyst Andrew Kuske thinks West Fraser Timber Co Ltd. has “an enviable position in both lumber and OSB markets.”
However, believing “pricing and housing dynamics are not currently supportive,” he initiated coverage with a “neutral” recommendation on Wednesday.
“In our view, WFG offers interesting and large-scale lumber and oriented strand board (OSB) exposure in North America and OSB in selected European markets,” said Mr. Kuske. “WFG holds roughly a 10-per-cent market share of North American lumber along with a ~30% share of OSB markets after the 2021 Norbord acquisition. We like the company’s positioning and longer-term approach to value creation, however, housing market dynamics (i.e., generally decelerating trends), declining lumber and OSB prices from past peaks keep us on the sidelines. A combination of improved housing trends, greater commodity prices or a lower share price would support a more constructive outlook.
“Is this time different? Our simple answer to that short question is ‘yes.’ In the last two decades (more focused on the post-Global Financial Crisis era of 2008-2009), both WFG’s core businesses in lumber and OSB became more consolidated, and demand is still well below past peaks. Pandemic-related dislocations in supply and somewhat rather unexpected surges in demand (e.g., lockdown era related home renovation projects) helped elevate pricing to levels not witnessed in prior cycles with very robust margins. Notably, WFG took excess cash flows to buy back more than US$2-billion of stock since 2020 – to us, that data point provides ample evidence of the team’s discipline around capital returns.”
He set a target of US$100 per share, which falls below the US$108.33 average on the Street.