West Fraser Gaining as Building Revives: Corporate Canada

West Fraser Timber Co., North America’s largest lumber producer, is forecast to surpass the record it touched in April as analysts look beyond a slump in wood prices to focus on the recovering U.S. housing industry.

The shares, which have climbed 68 percent in the past year, will gain an additional 21 percent to C$98.71 ($97.03) a share, according to the average of seven analysts’ 12-month price targets compiled by Bloomberg.

While lumber futures have plunged as much as 32 percent since reaching an eight-year high on March 13, analysts’ price targets for West Fraser have barely budged, according to data compiled by Bloomberg. The reasons for optimism include rising U.S. new-home sales, which probably are about a third of the way to a “normalized” level, and long-term lumber demand from China, said Paul Quinn, a Vancouver-based analyst at RBC Capital Markets who has a C$100 price target on West Fraser.

“For all those people who thought they missed this cycle, they haven’t,” Quinn, who this week raised his rating on the stock to the equivalent of a buy from hold, said in a telephone interview. “If this was a baseball game, we’re in the third inning of the housing recovery.”

That view is shared by West Fraser Chief Executive Officer Ted Seraphim, who said his evaluation is based on other economic indicators including home affordability and historically low interest rates.

‘Recovering U.S.’

“It’s all against a backdrop of a relatively slowly recovering U.S. economy,” Seraphim said in a June 3 interview at West Fraser’s downtown Vancouver headquarters.

New-home sales in April climbed to an annual pace of 454,000, the second-highest in almost five years, the U.S. Commerce Department said May 23. The annual pace peaked at a record 1.39 million in July 2005, according to data compiled by Bloomberg.

Part of the reason for the steep decline in lumber prices this year was that they rose too quickly late in 2012 and into the first quarter, said West Fraser Chief Financial Officer Larry Hughes.

In January, blogs about the lumber industry “were full of fear of shortages,” Hughes said in the June 3 interview.

Rail Constraints

Futures soared to a closing high of $406.80 per 1,000 board feet in March after a shortage of railway cars crimped Canadian exports in January and February, Hughes said. Lumber prices plunged through May as the rail constraints were resolved and producers such as West Fraser increased U.S.-bound shipments, he said.

About 52 percent of British Columbia’s softwood-lumber exports were shipped to the U.S. last year and 31 percent went to China, according to government data. A decade earlier, 83 percent of B.C. exports were shipped to the U.S. and 0.5 percent went to China.

B.C. softwood-lumber shipments to the U.S. soared by 45 percent in April from a year earlier, while exports to China were little changed, according to provincial data.

RBC’s Quinn said he remains optimistic about the long-term outlook for lumber demand from China, one of the fastest-growing markets for the province’s wood products in recent years, and points to production constraints in B.C. because of the impact of the world’s largest infestation of mountain pine beetles.

Quinn expects the average cash price of benchmark western lumber to rise to $350 per 1,000 board feet this year from $299 last year.

Declining Prices

Lumber futures for September delivery fell 0.7 percent to $287 per 1,000 board feet today on the Chicago Mercantile Exchange. The price has declined 23 percent this year after climbing 44 percent in 2012.

West Fraser, which fell 1.2 percent to C$81.29 at the close in Toronto, touched a record C$92.70 on April 25. Crosstown competitor Canfor Corp., which declined 1.2 percent to C$18.07, reached a record of C$21.89 on March 20 and has an average price target of C$22.46. Both companies this year have outperformed the Standard & Poor’s/TSX Composite Index and the S&P/TSX Materials Index.

Not all industry observers are as confident about the outlook for housing in the U.S. Housing starts dropped a greater-than-expected 16.5 percent in April to an annual pace of 853,000, the Commerce Department reported on May 16.

‘The Reality’

Lumber prices have fallen more “than anticipated, suggesting that the reality of the U.S. housing recovery is somewhat different from the hype and excitement,” David Elstone, a Gibsons, British Columbia-based lumber-industry analyst at ERA Equity Research Associates Inc., said in a June 11 phone interview.

“Lumber demand is up, but maybe not as much as some other people expected,” Elstone said.

U.S. housing starts in May are estimated to have risen to an annual rate of 952,000, according to the average of 72 economists and forecasters surveyed by Bloomberg. Starts reached an annual pace of 2.27 million in January 2006, data compiled by Bloomberg show. The May housing data is scheduled to be released June 18.

West Fraser’s Hughes said the company is unfazed by what he believes are short-term changes in housing construction activity and lumber demand.

“We’ve seen a correction in lumber prices and share prices and that’s nothing that we think is unusual,” Hughes said. “We’ve been saying pricing would be saw-toothed as demand moves up.”

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