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West Fraser Timber: That is A Bingo For $100/Share (NYSE:WFG)

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Shares with excessive multiples and no earnings however with massive desires stacked on prime of nice narratives are within the strategy of re-rating to decrease multiples. In the meantime a complete vary of industries are starting to obtain some consideration in all probability lengthy overdue: cyclicals/industrials, vitality, banks, and so on. Take for instance West Fraser Timber (WFG). West Fraser Timber is an organization I wrote about final yr starting in Might of 2020 – a bit after the massive peak in lumber costs which you’ll be able to see right here:

West Fraser: Let The Good Occasions Roll

West Fraser Timber Stock: The Path In the direction of $100

West Fraser Timber And The Alligator Jaws Of Worth

West Fraser Timber Stock: Bullish Backdrop Forward Of Q3 Earnings Report

A core component of my thesis all through my writing on WFG was that, for my part, the market was, has been, and continues to cost WFG as if the enterprise goes to return to mid-cycle (or decrease) earnings beginning tomorrow whereas for my part, earnings will little doubt average/normalize however that normalization course of will in all probability take for much longer than the market is pricing in. Given the tremendous favorable backdrop within the housing market and the by no means ended impression COVID is having on logistics/provide chains, and so on, it might very effectively be the case that the lumber market takes WAY longer to normalize than most individuals assume and in the end might arrive at a brand new regular mid-cycle stage of enterprise considerably greater than the long term historic mid-cycle.

Look what has occurred to lumber costs over the previous yr:

Lumber futures prices

Lumber costs

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Provide and demand had been clearly out of whack within the April/Might/June 2021 interval sending costs hovering to an unsustainable peak and subsequent decline till discovering a flooring/help round $500-$600 per mbf stage, which thoughts you is effectively above the historic normalized common value round $350 per mbf. And after bouncing round at nearly double the long term historic common value throughout Q3, lumber caught a modest bid adopted by an enormous bid greater in This autumn again above $1,000 per mbf the place we at the moment discover ourselves as we speak. In every of those run-ups there appeared to be number of distinctive components starting from climate, to logistics bottlenecks, and what have you ever one off circumstances that at all times appear to come back up in a commodity market. By no means fairly the identical from one occasion to a different, however there at all times appears to be one thing in a majority of these companies.

Now, if you’re planning to construct one thing or do a undertaking, yeah certain, this too shall move, in case you can wait, it at all times does in some unspecified time in the future proper? However in terms of estimating the worth of an organization like West Fraser Timber, an organization competing in a mature commoditized trade, through which the great occasions invariably revert again to mid-cycle regular ranges in some unspecified time in the future (as do the doom and gloom occasions, finally btw) you want to get up to the truth that WFG is probably going going to generate WAY greater than mid-cycle ranges of money circulation the entire approach down again to normalized mid-cycle ranges. Bear in mind historic mid-cycle earnings are oriented round a long term common value of lumber round roughly $350 per mbf and the present futures value is 4x that stage! And on prime of that WFG is investing the excess money again into their very own enterprise and stability sheet by way of optimization initiatives, buying capability new to them, debt reductions, and lowering shares excellent which is all to say over time they’re changing into a greater and higher firm (a.okay.a. mid-cycle earnings capability, for my part, might be rising).

Because it pertains to the close to time period, I believe analyst forecasting this current spike in lumber costs are few and much between which implies, WFG is probably going going to generate WAY extra cash circulation than they had been banking on after they had been estimating 12 month value targets on WFG and value targets are in all probability going to be raised pretty quickly.

Stock price of WFG

Inventory Worth

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As a matter of truth, lately Scotia raised their value goal on WFG from $137C to $143C and CIBC raised their value goal from $120C to $150C as and rated the corporate “outperform”. So in USD, that works out to what about $115 to $120 USD per share, contemplating the inventory is buying and selling simply shy of $100/share on the time of writing that’s roughly a 15-20% upside case from present ranges, not so dangerous.

Backside line for me is that at 2.2x EV/EBIT, WFG shares are nonetheless buying and selling at ridiculously low-cost a number of.

Chart of EV/EBIT <span class=

In search of Alpha

Buying and selling for an inexpensive a number of is not at all times a fantastic factor however on this case the administration group seems has made some terrific strikes and is remaining disciplined from a capital allocation standpoint by shopping for again debt and repurchasing shares, growing dividends, and including to/diversifying manufacturing capability by way of acquisitions of current capability in the US (vs. constructing a bunch of latest capability). There are in all probability some one time changes coming because of the opposed situations in Canada that impacted West Fraser’s operations in Q3/This autumn however usually affordable folks should agree that the enterprise continues to roll ahead from the decrease left to the higher proper and as such I intend to hold on for the trip. In certainly one of my articles on WFG, I utilized an analogy I picked up from a nerdy podcast speaking in regards to the alligator jaws of worth and value and the way WFG was growing in worth however the value was primarily flat…now whereas I’d nonetheless argue its an alligator jaw scenario, the alligator has been wanting up! Let’s hope it continues.

Thanks for studying.

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