West Fraser Timber operations
Credit: West Fraser Timber

West Fraser Timber stock has more than tripled in value over the past 12 months

Following its acquisition of Norbord, the company is poised to take better advantage of a hot property market

The stock: It’s a truism that commodity price spikes benefit the marginal producer more than the quality one; the former’s profits, modest to begin with, increase by a higher order of magnitude than the latter’s. Hence West Fraser Timber Co. (TSX:WFG) has only tripled in value over the past 12 months versus, say, Interfor Corp. (TSX:IFP), which has quintupled.

The drivers: The rising tide of pandemic housing expenditures has lifted all log booms in the long-suffering forest industry. But there’s reason to believe that Vancouver-headquartered West Fraser—uniquely—still has room to float higher. That’s because two months ago, it completed its purchase of Toronto-based Norbord, meaning future quarterly earnings will include not only West Fraser’s diversified base of sawmills and plywood, pulp and paper mills in Western Canada and the American South, but also Norbord’s panelboard plants in North America and Europe.

Based on Norbord’s final annual report, issued in February, its acquisition adds $2.4 billion to West Fraser’s annual revenue and $865 million to operating earnings. Looking ahead, WFG promises increased exposure to the hot property market and, given its long history of profitability in a volatile industry, downside protection if the house of cards blows over.

Word on the street: Analysts covering the stock give it a 12-month target ranging from $80 to $130, with an average of $112.55. That represents a consensus 37-percent gain on the March 23 share price of $82.24. Then again, Brookfield Asset Management (TSX:BAM), which was Norbord’s controlling shareholder, recently opted to take some profits, selling hundreds of millions of dollars’ worth of shares on the open market. Brookfield still owns 15 percent of West Fraser’s shares outstanding, though, suggesting faith tempered by caution.

As the Simply Wall Street blog put it: “West Fraser Timber has been growing earnings at a rapid rate, and has a conservatively low [dividend] payout ratio, implying that it is reinvesting heavily in its business—a sterling combination.”

Coming and going: Shareholders of Richmond-based wood pellet producer Pinnacle Renewable Energy (TSX:PL) are set to vote on U.K.-headquartered Drax Group’s (LSE:DRX) $11.30-per-share takeover offer at a virtual meeting on March 31. The vote requires two-thirds approval to pass, but both Pinnacle’s board and Oncap Investment Partners, its largest existing shareholder, are backing the scheme, so there will likely be one fewer green energy option locally for retail investors.