Pacific Trader: Western Forest Products is in the deep (value) woods

With no debt to speak of, this high-end panel specialist looks well placed to ride out lean times and see big gains once wood markets recover.

Credit: Western Forest Products

Western Forest Products’ Saltair sawmill in Ladysmith

The coastal lumber producer’s stock should snap back when prices recover   

The stock: Many investors are keeping their powder dry in anticipation of a recession setting in later this year. They’re looking to buy stocks on the cheap as earnings sag and sentiment sours. But in some sectors, there’s no need to wait—the slump is already here. Take lumber, which buckled following a pandemic-induced price spike in 2021. Smaller, less diversified producers like Western Forest Products (TSX:WEF) have been particularly hobbled. But with no debt to speak of, this high-end panel specialist looks well placed to ride out lean times and see big gains once wood markets recover.

The drivers: Headquartered in Vancouver, Western Forest operates sawmills, timberlands, remanufacturing facilities and a mass timber plant in the northwest coast rainforests of B.C. and Washington. It is not beholden to the U.S. market and its attendant softwood tariffs, though, with only 28 percent of its sales there. More than a third of its output is sold in Canada, with the rest around the Pacific Rim.

Since peaking at $2.45 a share two years ago, WEF stock has tumbled to $1.10 as of May 9. Still, the company remains profitable over the past four quarters and pays a respectable dividend yield of 4.5 percent. Last year, it bought a Washington-based glulam manufacturer, Calvert Company, which gives it an outlet for its wood chips and a toehold in the growing market for structural mass timber.

It’s also been burnishing its ESG (environmental, social and governance) cred, highlighting in investor presentations its partnerships with First Nations and the fact its operations are a net carbon sink. As for labour relations, the union contract that settled a bitter eight-month strike on Vancouver Island in 2019 and 2020 doesn’t expire until early 2025.

Word on the street: Raymond James analyst Daryl Swetlishoff foresees a “profitability turnaround in the current quarter with earnings augmented by downward stumpage revisions on the B.C. coast.” He has an “outperform” rating and $1.35 target on the stock.

Coming & going: A new, Canadian-based suitor has emerged in the tussle over Teck Resources‘ (TSX, NYSE:TECK.B) planned spinoff of its coking coal mining operations in the Kootenays. A consortium led by Pierre Lassonde, co-founder and chairman emeritus of Franco-Nevada Corp. (TSX:FNV), has reportedly made a proposal to acquire the coal mines in a deal that would thwart Swiss multinational Glencore PLC’s designs on Vancouver-based Teck. The dealmaking has been on hold since Teck cancelled a shareholder vote at its annual meeting in late April.