In March, the world was under lockdown, and work from home became a part of our culture. It’s been six months now, and while lockdown restrictions have slowly been lifted, people are still not comfortable with returning to a physical offices to work.
While that has spelled bad news for commercial office space, it’s boom time for timber companies as renovations and do-it-yourself projects at home coupled with a massive increase in home construction have soared.
Why is there a lumber shortage?
This has led to a massive shortage of lumber as people scramble to get their homes ready for a new lifestyle. Sawmills in Canada and the U.S. can’t keep up with the strong demand for home construction in both countries. When the lockdown began, it was expected that the lumber industry would suffer as unemployment would curtail demand.
However, government stimulus programs like CERB (Canadian Emergency Response Benefit) has ensured that people have resources to spend on home renovations and repairs. This, along with production cuts by timber companies, has caused prices for timber to shoot up.
Madison’s Lumber Reporter, which covers prices for Canadian and U.S. construction framing softwood lumber and panels, updated its prices on September 29, 2020. With the exception of two categories, prices for all types of lumber have increased between 120%-227% since September 29, 2019. Its weekly comment was, “Sawmill order files were around three weeks out with very limited material available any earlier.”
If you are a contractor and have placed orders for timber, there is a hefty waiting period for the same. If you are a home buyer, you can expect to pay a lot more for your home. A Fortune.com article estimated that “severe lumber shortage’ is adding $14,000 to the cost of a new home.”
Median sales prices for homes sold in the U.S. were $312,800 in August 2020 compared to $293,000 in August 2015. New home sales are at their highest level in the U.S. since July 2006.
Room for upside
It doesn’t appear that the lumber shortage in North America will disappear anytime soon. That’s good news for timber companies who have already seen their stock prices rise significantly this year.
Resolute Forest Products, a company with a market cap of $490 million, has seen its stock price increase from $1.75 on March 30, 2020, to $5.7 today, a gain of 225%. The company produces market pulp, wood products, and newsprint and sells them in over 60 countries. Analysts have given it a target of $13.75.
I had written about West Fraser Timber at the start of August, saying that it was poised for a good year. The stock has moved from $25 levels in March to over $62 today. Analysts have given West Fraser a target of $83, and when you take a look at the pace of construction and renovation, there is little reason to believe that it won’t achieve this target sooner than later.
Canfor Corporation is trading at $15.09, up from $6.55 in March; and analysts have given this stock a target of $24.58. There is still a lot of upside in these stocks and based on current timber consumption, they are good stocks to bet on.
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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.