Author Topic: WFT - West Fraser Timber  (Read 7196 times)

Viking

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WFT - West Fraser Timber
« on: July 27, 2018, 06:19:51 PM »
West Fraser just posted very strong results for Q2. However, the stock has sold off due to the weak US new home construction numbers. I just listened to the Q2 conference call and management continues to feel lumber prices will remain high due to growing demand and constrained supply. The US south is the only region in North America increasing supply.

West Fraser is a best in class operator and is ideally positioned to continue to benefit from rising lumber prices. Looks to me like lumber prices might stay higher for longer than currently expected.

Overview of their business: https://www.westfraser.com/investors/presentations

Insider buying: https://www.theglobeandmail.com/investing/markets/inside-the-market/article-insiders-buy-shares-even-as-west-fraser-timber-tumbles/



no_free_lunch

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Re: WFT - West Fraser Timber
« Reply #1 on: July 28, 2018, 10:13:21 AM »
Thanks, spent some time on it and it seems solid.  Still much work to do.  Their track record is excellent and the data for housing starts is compelling.

This guy has a good track record and focuses on housing data:

Quote
Higher mortgage rates and the new tax policy appear to be impacting home sales in some areas. But this is a slowdown from a hot market, and I expect the key sectors - single family starts and new home sales - will see further growth. 

https://www.calculatedriskblog.com/2018/07/housing-comments-from-soylent-green.html

Viking

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Re: WFT - West Fraser Timber
« Reply #2 on: July 28, 2018, 08:13:43 PM »
West Fraser said that increase in demand for lumber is running at twice the increase in supply. They expect this trend to continue for the next few years. One reason is lumber supply coming from BC cannot grow as mills transition from mountain pine beetle wood (which was being overlogged) to new wood; the allowable cut in the BC interior has come way down the past couple of years.

West Fraser has done a masterful job of anticipating the lower volumes in B.C. and grown its operations into the US south over the past 5 years. Their purchase last summer of Gillman was timed perfectly and they said on the Q1 call that it will exceed their return expectations (already). They also said on the Q1 call that as they upgrade the Gillman mills they will be able to extract 20% more lumber from the same tree volume (less waste). West Fraser is the low cost producer and they understand what it takes to improve operations at mills.

They are very good capital allocators. They are now buying back shares very aggressively in 1H at prices from $85 to $95. This looks to be continuing in Q3. This tells me that they see high lumber prices as not just being a temporary 2018 blip. They see demand growing more than supply for the next couple of years and this should keep prices high. Lumber is very cyclical; we are just starting the good times and the amount of cash the lumber companies are starting to earn is very impressive.

If the US economy continues to grow and if new housing starts continue to grow (which is what Calculated Risk feels is most likely the next couple of years given starts are still low based on historic numbers) then lumber prices could remain high for an extended period.
« Last Edit: July 28, 2018, 08:20:43 PM by Viking »

Viking

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Re: WFT - West Fraser Timber
« Reply #3 on: July 29, 2018, 11:14:53 AM »
Lumber market running hot
https://www.woodbusiness.ca/industry-news/markets/lumber-market-running-hot-5031

Lumber producers profit from record prices
https://www.ft.com/content/3dc676f8-74d3-11e8-aa31-31da4279a601

What do forest fires, wood-eating beetles and US President Donald Trump have in common? They have all helped push the price of lumber to historic heights, leading to record share prices for lumber producers and higher prices for US homebuyers.

The price of lumber has increased 57 per cent since the start of 2017, according to the Random Lengths framing lumber composite price index, going from $356 to $571 per thousand board feet.

Analysts attribute the price spike to steadily increasing demand and a coincidence of supply shocks in British Columbia, one of the world’s largest producers of softwood lumber.

“When you have a tight supply chain, as soon as one thing goes wrong, prices skyrocket,” said Brendan Lowney, principal and macroeconomist at Forest Economic Advisors. “You almost have a vertical supply curve.”
« Last Edit: July 29, 2018, 11:35:29 AM by Viking »

no_free_lunch

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Re: WFT - West Fraser Timber
« Reply #4 on: July 30, 2018, 11:28:42 AM »
Viking, how do you value WFT?  Earnings could probably be $10+ for next few years but then I am not sure what happens during a downturn.  Any general sense of full cycle average earnings?  Maybe it's not possible to calculate such a thing given it's commodities but I have to try.

Viking

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Re: WFT - West Fraser Timber
« Reply #5 on: July 31, 2018, 04:13:23 PM »
No free lunch, I am still learning and getting back up to speed with West Fraser so I do not have my own strong thoughts on earnings. RBC is currently forecasting adjusted earnings of $14 for 2018 and $12 for both 2019 and 2020.

At this point I am thinking mostly about supply and demand for timber the next couple of years. I am from the B.C. interior so am very aware of the issues with pine beetle and what that will be doing to lumber supply coming out f that region in the coming years (flat to lower supply). It sounds to me like the US south is the only region that will be growing supply in the coming years. If demand grows as expected then prices will remain elevated.

It is also interesting to see the impact disruptions have on price. First we had abnormally bad forest fire issues last summer in BC. Then there were severe shipping issues, also in B.C. interior, in Q1. Given how tight the market was already both of these events spiked prices higher.

WFT looks to me like a decent leveraged play on the US economy. If the US economy continues to grow at 2-3% the next couple of years then WFT should do exceptionally well. As I continue to read more the next month or two I will get more of an opinion about earnings and the various probabilities.

I should also warn you; I worked in a WFT plywood plant for 4 summers (it put me through university) so I have a soft spot for the company :-)
« Last Edit: July 31, 2018, 04:15:56 PM by Viking »

Viking

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Re: WFT - West Fraser Timber
« Reply #6 on: July 24, 2019, 09:34:35 AM »
What a difference a year makes. We had what appeared to be ‘peak lumber’ in 2018. Prices and profits were at cycle highs. 2019 has been a disaster for lumber companies. Prices and profits have plumetted. Lumber prices (and share prices of lumber producers) have been on a roller coaster ride. The good news? Most lumber producers are trading at or near 52 week lows.

How is demand doing? While new housing starts are soft, they are not falling off a cliff. More importantly, if bond yields continue to fall, mortgage rates should stimulate demand for new housing.

How is supply doing? The BC interior (one of the largest producing regions in North America) in the last 2 months has announced mill closures that will permanently reduce production by about 15%, which is significant. More closures are expected (this is being driven by the massive reduction in harvestable wood available due to pine beetle and forest fires). Bottom line, a supply shock is coming in Q3 or Q4.

Article discussing closures ( more have been announced since it was released): https://www.kamloopsmatters.com/local-news/slump-in-bc-forestry-industry-not-over-yet-bad-news-for-interior-communities-1590677

Investment thesis: if you think the US economy will continue to bubble along at 2% growth in 2020 and beyond then we may see another spike in lumber prices (and lumber stocks). If we get an uptick in demand for lumber (free money from the Fed goosing the housing market in the US) at the same time lumber supply is significantly ramping down (significant permanent mill closures in BC interior due to lack of fibre) we should see a spike in lumber prices and profitability of lumber companies. Not a bet the farm type of investment but perhaps one worth considering with a small amount.

As central banks rush to lower rates i wonder if all the free money will not over time create another asset bubble (bonds, stocks and real estate). If we get a real estate boom in the US in the next few years the lumber companies will once again soar in price.

North American lumber production down 3.5% through April 2019 (Western Wood Products Association's Lumber Track publication)
- Total production was 20.306 billion board feet, down from 21.037 bbf through April of 2018.
- U.S. output totaled 11.718 bbf through April, up 0.9% from the first four months a year ago. Production in the West was down 1.8% to 4.797 bbf, while output in the South gained 3.0% to 6.370 bbf.
- Canadian production totaled 8.588 bbf through April, down 8.8%. Output in B.C. dropped 16.2% to 3.587 bbf, while production East of the Rockies fell 2.7% to 5.001 bbf.
« Last Edit: July 24, 2019, 09:47:59 AM by Viking »

no_free_lunch

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Re: WFT - West Fraser Timber
« Reply #7 on: July 24, 2019, 10:39:54 PM »
Thanks for the post.   I still don't have a position but it's getting interesting.

I came across this. They argue for significant increases in wood frame construction for environmental reason s.

http://www.bbc.com/future/story/20190717-climate-change-wooden-architecture-concrete-global-warming

Castanza

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Re: WFT - West Fraser Timber
« Reply #8 on: November 27, 2019, 07:33:08 PM »
Lumber is up 26% since July. Potentially beginning to see the supply shock take effect. Q3 management seemed mildly optimistic that supply and demand would reach “a more balanced situation.” Q3 Lumber shipments exceeded production by 179 million board feet. Q4 results could be interesting.

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Viking

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Re: WFT - West Fraser Timber
« Reply #9 on: March 30, 2020, 03:08:43 PM »
Bought a little West Fraser today. In for an ugly couple of months perhaps year. But looking out 2 or 3 years, more houses will need to be built. With historically low interest rates it would not surprise me if home building was a growth engine in US GDP in the coming years. Stock looks cheap and they will be a survivor. Not as impressed with some of the decisions the past 2 years; clearly were too aggressive with share buybacks (at much higher prices) and their debt level is elevated compared to the past. I wonder if the current management team is average (past CEO’s were very good). I also bought A little Interfor (IFP) as they have made some solid moves over the past decade and look positioned well.

Does anyone have an opinion of what one is better today: WFT or IFP?

PS: Western Forest Products (Vancouver Island lumber producer) had a scrap with its union last year that resulted in an 8 month strike and a severe reduction in its operations. The company got through it just fine. This tells me i am likely way over-estimating the economic impact/cost of even prolonged shutdowns (i.e. of even 6-8 months) due to the virus. Prices of forestry stocks are likely crazy cheap.

———————————————————

Some recent buyers of WFT shares

West Fraser Timber Co. Ltd. (WFT-T)

Between March 9 and March 18, billionaire businessman Jimmy Pattison steadily accumulated shares in the market. He acquired a total of 1,275,000 shares at an average price per share of approximately $33.55 for an account in which he has indirect ownership (Great Pacific Financial Services Ltd.). The cost of these purchases, not including trading fees, totaled over $42-million.

Between March 9 and March 24, president and chief operating officer Raymond Ferris invested over $278,000 in shares of the company. He bought a total of 9,250 shares at an average cost per share of roughly $30.11, increasing this account’s holdings to 35,137 shares.
« Last Edit: March 30, 2020, 03:16:56 PM by Viking »