Raymond James analyst Daryl Swetlishoff expects fourth-quarter earnings season for building materials producers to “cap off an overall difficult 2023 with a thud,” predicting weaking results that fall short of the Street’s expectations.
“We expect this to be largely priced in with stocks trading off in recent weeks,” he said. “Despite retrenching recently, since Halloween the 2023/24 seasonal trade has returned approximately 20 per cent for both cash lumber pricing and building materials share prices (vs. the TSX returning 11 per cent).”
However, in a research report released Tuesday, Mr. Swetlishoff thinks long-term investors could be rewarded for their patience.
“Is it time to throw in the towel on the Tree stocks? While spring lumber pricing could come off seasonally, we have conviction that holders will be rewarded over the next 12 to 18 months,” he said. “Looking forward, we expect building materials share prices will exhibit greater correlation with structurally higher commodity prices. Key takeaways from our recent 14th Annual Building Materials & Homebuilding Forum support our constructive commodity price outlook. Specifically, optimism surrounding homebuilding activity levels coupled with expectations for further (material) BC and Quebec production shuts along with reduced European shipments (off 50 per cent year-over-year).
“Further, with commodity prices starting 2024 on an improved footing (benchmark WSPF 2x4 is up 11 per cent quarter-over-quarter), we expect sector earnings are entering a recovery phase with seasonally accelerating single-family housing and stable R&R demand providing a backstop. In conjunction with this note, we have rolled our valuation base forward to 2025 – assuming US$500/mfbm [thousand board feet] lumber prices supporting 50-per-cent average upside. Despite our constructive stance on the sector, we see the announcement of preliminary Administrative Review (AR5) duty rates by the US Department of Commerce (US DOC) as a net negative development for Canadian lumber production, facing higher duty rates across the board starting 3H24.”
West Fraser Timber Co. Ltd. ( “strong buy”) to US$105 from US$100. Average: US$110.
“Reflecting West Fraser’s geographic and product diversification, we maintain our Strong Buy rating for the stock and highlight the bulk of the company’s operating platform remains unaffected by the duty revisions or further potential negative BC government legislation. Similarly, we regard Interfor’s minimal central BC exposure and high lumber leverage as a positive and maintain our Strong Buy rating. Lastly, we continue to regard building materials distributor Doman Building Materials as providing excellent risk/reward in a recovering building materials commodity scenario over our investment horizon,” he said.2