Canadian lumber producers have spent years managing U.S. duties. A lower announced rate offers welcome relief when margins are already thin. It also requires a careful look at which charges changed and which ones are still sitting on the invoice.
The final results of the seventh administrative review, announced October 14, put West Fraser Timber‘s (TSX: WFG) combined anti-dumping and countervailing duty rate at 20%. That compares with 26.5% under the previous review, a reduction of 6.5 percentage points.
West Fraser received the lowest combined rate among the named producers in the government’s table. The new rates take effect after publication in the U.S. Federal Register. So, what should investors expect?
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Less expensive isn’t duty-free
Separate tariff measures remain relevant. The additional 10% Section 232 tariff on softwood lumber isn’t erased by this administrative review. Nor does a lower duty guarantee that producers retain every dollar of relief. Selling prices, customer negotiations, and exchange rates can affect the eventual earnings benefit.
A simple illustration shows the size of the change. On $100 of covered export value, a 6.5-percentage-point reduction means $6.50 less in those combined duty deposits once the new rate applies, with other charges held constant. That’s useful relief in an industry where margins can disappear quickly.
It still doesn’t persuade someone to buy a house they cannot afford. Lumber demand depends heavily on construction and renovations, and financing costs remain an obstacle. A better trade ruling can improve the economics of existing business without generating a flood of new orders.
Work to do
West Fraser Timber makes lumber and engineered wood products, with operations on both sides of the border and in Europe. That production footprint means the investment isn’t simply a wager on one duty rate applied to Canadian shipments.
The company’s second quarter produced US$59 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It also recorded a net loss of US$61 million. Those two figures belong together. Positive adjusted operating cash earnings showed improvement, while the bottom line made clear that the recovery wasn’t complete.
The shares recently traded at $92.94 with a dividend declared at US$0.32 a share. Investors comparing its income with other dividend stocks need to allow for currency conversion and avoid confusing a U.S.-dollar payout with the Canadian share price.
Considerations
A conventional earnings multiple is of limited help while the company is reporting losses. Its New York close of US$65.70 puts the US$1.28 annualized dividend yield near 1.9%. The modest income doesn’t compensate for a prolonged slump by itself. A low-looking share price isn’t much comfort if the recovery keeps moving further down the calendar.
There are genuine risks. Lumber prices could weaken, housing activity could disappoint, and trade disputes can take another turn. Investors building a Canadian stock portfolio should size a forestry position for those swings, not for the most optimistic interpretation of a favourable announcement.
The US$0.78 quarterly loss also limits the usefulness of a conventional price-to-earnings ratio today. This is a recovery investment, not a profitable compounder merely waiting for investors to notice. I would wait for clearer earnings improvement before making a large commitment. Investors comfortable with a smaller cyclical position can follow whether the lower duty burden improves results once the rate actually takes effect.
Bottom line
West Fraser interests me as a patient cyclical investment, with duty relief offering one possible improvement. Before buying, I’d want evidence that better selling conditions and mill performance can turn that relief into durable cash generation. The next useful milestone is a healthier business earning through the cycle, not merely a smaller government charge on the same shipment.
