West Fraser Timber Co. Ltd. (TSX:WFT), one of the largest integrated wood products companies in North America, announced better-than-expected first-quarter earnings results after the market closed on April 23, and its stock has responded by rising over 5%. Let’s take a closer look at the quarterly results to determine if we should consider buying in to this rally, or if we should wait for it to subside.
Breaking down the better-than-expected results
Here’s a summary of West Fraser’s first-quarter earnings results compared with what analysts had anticipated and its results in the same period a year ago.
|Adjusted Earnings Per Share||$1.19||$0.94||$0.97|
|Total Revenue||$1.01 billion||$909.9 million||$809 million|
Source: Financial Times
West Fraser’s adjusted earnings per share increased 22.7% and its total sales increased 25.3% compared with the first quarter of fiscal 2014. The company’s double-digit percentage increase in earnings per share can be attributed to its adjusted net income increasing 19% to $100 million, helped by its weighted average number of diluted shares outstanding decreasing 2.6% to 84.95 million.
Its very strong revenue growth can be attributed to revenues increasing in all three of its business segments, including 30.5% growth to $655 million in its Lumber segment, 17.9% growth to $230 million in its Pulp & Paper segment, and 15.2% growth to $129 million in its Panels segment.
Here’s a quick breakdown of eight other notable statistics from the report compared with the year-ago period:
- Sales in the United States increased 22.8% to $533 million
- Sales in Canada increased 13% to $218 million
- Sales in China increased 57.7% to $164 million
- Sales in Asia (excluding China) increased 56.9% to $80 million
- Sales in all other regions decreased 29.6% to $19 million
- Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 16.1% to $173 million
- Operating earnings increased 17.9% to $125 million
- Total assets increased 4.5% to $3.55 billion
Could your portfolio use a timber stock?
Even after the post-earnings pop in West Fraser’s stock, I think it represents an attractive long-term investment opportunity. It still trades at favourable forward valuations, including just 13.5 times fiscal 2015’s estimated earnings per share of $4.81 and only 10.1 times fiscal 2016’s estimated earnings per share of $6.40, both of which are very inexpensive compared with the industry average price-to-earnings multiple of 22.5.
I think West Fraser’s stock could consistently command a fair multiple of at least 15, which would place its shares upwards of $72 by the conclusion of fiscal 2015 and around $96 by the conclusion of fiscal 2016, representing upside of more than 10% and 47%, respectively, from today’s levels.
With all of the information provided above in mind, I think West Fraser Timber represents one of the best long-term investment opportunities in the wood products industry today. Foolish investors should take a closer look and strongly consider beginning to scale in to long-term positions.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joseph Solitro has no position in any stocks mentioned.