Logs are piled up at West Fraser Timber in Quesnel, B.C., in 2009.JONATHAN HAYWARD/The Canadian Press
Canadian forestry stocks have enjoyed a spectacular rebound after plunging catastrophically during the lockdown of February and March. Good news for latecomers: Some observers believe the rally has plenty of room to run amid tight lumber supplies and surging demand.
“I don’t see it ending any time soon,” timber analyst John Duncanson said in an interview. Mr. Duncanson is a principal at Corton Capital, which runs the Corton Global Timber Fund.
West Fraser Timber Co. Ltd. offers a typical example of the head-spinning market gyrations of the past six months. The stock fell 64 per cent over a six week period, before bottoming out on March 23 amid concerns that the novel coronavirus pandemic would sideline building activity and weigh heavily on lumber prices.
Wrong call. The stock has soared 213 per cent since March and is now well above prepandemic levels amid a hum of building activity and rising lumber prices. West Fraser recently reported that its profit, after adjustments such as duties, increased to $1.13 a share in the second quarter ended June 30. That’s up substantially from 42 cents a share in the first quarter.
Similarly, Canfor Corp.‘s share price has rebounded 190 per cent from its March lows. Interfor Corp. has risen 267 per cent. Norbord Inc., which makes oriented strand board (or OSB, a type of engineered plywood used in construction), has risen 248 per cent.
But forestry stocks are still 20 per cent or more below their 2018 highs, suggesting that valuations are not yet stretched.
It turns out we need wood in good times and bad – and a lot of wood when we are stuck at home. Homeowners and contractors working on renovation projects are struggling to find lumber supplies, as detailed in a Globe and Mail article published earlier this week.
Some lumber prices have doubled over the past year. The price of Western SPF lumber (spruce, pine, fir) rose 12 per cent within the past week alone.
At the same time, home building activity in the United States has proved resilient, helped by falling mortgage rates. The S&P Homebuilders Select Industry Index, consisting of companies that consume massive amounts of lumber, earlier this month hit its first record high in 15 years. That’s right, home building stocks have surpassed their highs last seen during the housing bubble that precipitated the financial crisis in 2008.
So why stick around in the hope that these ideal conditions linger and Canadian forestry stocks rise even higher? The bullish take is that the supply and demand dynamics that are supporting the current conditions for lumber are showing no signs of abating.
Companies can’t just flick a switch to produce more lumber because they are already operating close to full tilt. Mr. Duncanson said that 13 sawmills have been shuttered permanently in the B.C. Interior since 2019 because of the infestation of the mountain pine beetle. That has removed an estimated 2.6 per cent of North American lumber supply that isn’t coming back.
In the U.S. South, another big lumber-producing region, companies delayed a number of expansion projects because of the spread of COVID-19, leading to a tight regional market that Mr. Duncanson expects will persist into 2021.
“I don’t see lumber prices collapsing here because there is no major supply wave coming on,” he said.
A number of analysts agree. Daryl Swetlishoff, at Raymond James, noted that the lumber market corrected in 2018 because a glut of lumber encountered a weakening U.S. housing market after the Federal Reserve began to raise its key interest rate.
“With year-to-date shipments outstripping production and positive U.S. housing indicators, we do not see the same scenario today,” Mr. Swetlishoff said in a recent note.
That should translate into surging profits ahead. Hamir Patel, an analyst at CIBC World Markets, expects that West Fraser will produce adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $600-million in 2020, up nearly 12 per cent from his previous forecast of $538-million. In 2019, West Fraser reported EBITDA of just $134-million.
“Rising U.S. home prices, low mortgage rates and an ageing U.S. housing stock suggest repair and remodelling demand should remain strong into 2021,” Mr. Patel said in a note.
If he’s right, forestry stocks could end the year as one of the best ways to navigate the COVID-19 economic upheaval, after starting the pandemic with some of the hardest-hit casualties.
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David Berman