The economic recovery that investors are expecting is taking certain sectors skyrocketing today. Among the most economically sensitive sectors investors look to for growth in such times is the lumber space.
Those seeking capital appreciation and looking to play this momentum may want to consider West Fraser Timber (TSX:WFT). Being one of the world’s largest lumber producers, it is a good barometre of the North American housing market in general. With real estate continuing to outperform, this stock has really taken off of late. Indeed, those who believe this momentum will continue ought to consider this stock.
Fundamentals speak for themselves
West Fraser is a global leader in lumber, laminated veneer, pulp, plywood, and newsprint production. Given where lumber prices are today, perhaps the company’s recent earnings release isn’t surprising. However, amid a pandemic, the fact that lumber producers are soaring to this extent is certainly an intriguing thing to watch.
West Fraser’s free cash flow grew over 300% year on year to reach $1.78 billion. That amounts to an attractive cash flow yield of 14.4% on a four-quarter trailing basis. This firm yields 0.8%, with a low 4% payout ratio. That’s not bad.
Sales in the third quarter grew by a massive 50%, with cash flow per share growing by 588%. Expected EPS stands at $16 in 2021, representing growth of 35%. Forecasted ROE is also impressive, at 27%. Despite this, the company’s price-to-earnings ratio remains low, as the market doesn’t seem to believe these lumber prices can continue.
Technical Analyst Tony Popowich noted that West Fraser has a 14% potential upside right now due to a sustained technical breakout over $115.
Soaring lumber prices the key driver of growth right now
A recent report from TimberMart-South reports that lumber prices are soaring, as the demand for wood is skyrocketing in the current market. However, prices for trees themselves remain relatively cheap, contributing to this surge in share prices of wood suppliers.
Lumber companies like West Fraser pay a “stumpage fee” to the landowners. An abundance of harvest-ready trees has kept this fee extremely low in southern parts of the U.S., which is home to more than half the country’s production. Stumpage for Louisiana pine sawtimber on March 31 was $22.75 per short ton — a low not seen since 2011.
Meanwhile, the demand for wood is up, causing futures to go up by almost 85% this year. This is providing absolutely massive margins for lumber producers like West Fraser right now.
Accordingly, investors considering playing the lumber space would be best served by considering high-quality producers like West Fraser today.