Forest products: the ultimate renewable resource

When it comes to having a renewable resource, you can’t do much better than a forest products firm. That’s one reason why Michael Simpson likes Vancouver-headquartered West Fraser Timber Co. Ltd. (WFT–TSX).

But the company also benefits from wood’s status—especially among home builders—as environmentally friendly, says Mr. Simpson, senior vice president at Sentry Investments in Toronto.

Moreover, as North America’s biggest lumber producer, as well as Canada’s biggest pulp maker, West Fraser obviously enjoys economies of scale.

And with its large footprint, the company is well-suited to withstand market cycles, says Mr. Simpson, noting that because of its broad customer base—Canada, the U.S., China, Japan and South Korea—West Fraser boasts diversified revenue.

Change of heart is likely

Mr. Simpson suggests that the company, like all lumber producers, suffers from China’s historic reluctance to build with wood. But he thinks the Chinese will eventually change their minds.

He also believes China’s economy, which has been slowing down, will eventually start picking up. In the meantime, as an exporter, West Fraser is able to capitalize on a low loonie.

Elsewhere, the company stands to benefit as U.S. housing starts are likely to rise to 1.3 million from one million over the next four years. Mr. Simpson thinks West Fraser will be particularly successful in this regard, given its many mills in the southern U.S., a region whose population continues to grow.

For Mr. Simpson, West Fraser Timber is a best buy—one with an 18-month price target of $67—as well as 2015 and 2016 net earnings estimates of $5.37 and $6.18 a share, respectively.

In addition to lumber and pulp, West Fraser turns out plywood and newsprint. Besides its mills in British Columbia and Alberta, the company boasts operations in North and South Carolina, Georgia, Florida, Alabama, Louisiana, Tennessee, Arkansas and Texas.

For the three months ended Sept. 30, West Fraser’s net earnings rose to $70 million or $0.83 a share, from $55 million, or $0.64 a share, for the similar period in 2013.

Sales were also higher, jumping to $1 billion from $878 million, while operating earnings rose to $111 million from $73 million.

 

Investor’s Digest of Canada, MPL Communications Inc.
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