Any fears U.S. softwood tariffs would take their toll on Canadian timber producers have so far proven unfounded.
The likes of West Fraser Timber (WFT.TO), Interfor (IFP.TO) and Canfor (CFP.TO) have all posted double-digit returns over the course of the last year, with Canfor’s nearly 50 per cent jump pacing the group.
The U.S. imposed final tariffs ranging from 17.90 per cent to 23.76 per cent on Canadian timber producers late last year after hitting them with preliminary duties earlier in 2017.
The group has been buoyed by a number of factors, not least of which is surging demand among American homebuilders. The U.S. built homes at a more-than 1.3-million annualized pace through much of the first half of the year, driving lumber prices higher in the process. Though the underlying commodity has taken a step back this summer, prices peaked at a record US$651 per thousand board feet in mid-May.
Those higher prices are magnified by the relative weakness in the loonie. Since lumber is priced in U.S. dollars, Canadian producers reap the exchange-rate benefit when they sell to American customers.
The natural geographic hedges the companies enjoy have also played a role.
Interfor’s nine U.S. sawmills, located in the Pacific Northwest and the American Southeast, actually boast more capacity than its five Canadian mills. Likewise, Canfor has operations spread out through the southeastern United States, in the Carolinas, Alabama, Mississippi, Georgia and Arkansas. West Fraser, for its part, has 24 operations in the U.S. helping to soften the tariff blow.
Though U.S. homebuilding activity has held up through most of this year, there were initial concerns tariffs could put the brakes on housing south of the border. When the final determination was handed down, Resolute Forest Products said the only beneficiaries of restrictions on Canadian lumber were “large timber barons” and warned that American workers and homebuyers would lose out.
The fact that gloomy prediction didn’t come to pass has been borne out by a string of robust results from the Canadian producers. West Fraser delivered record earnings in its second quarter, easily topping expectations. On a conference call to discuss the performance, Chief Executive Officer Ted Seraphim said he was “optimistic” about continued strength in lumber demand in the medium and long-term.
West Fraser hasn’t gone unnoticed by the analyst community. In a research note upgrading his view of the stock to an outperform, RBC Dominion Securities analyst Paul Quinn said a recent dip in the stock made the company a prime buying opportunity.
“We have consistently recognized [West Fraser] as a core long-term holding and the company has a justifiable premium multiple to peers (although a bit wider than we would have liked over the recent past,)” he wrote. “With the combination of a slight pullback in the share price and our expectations for ‘higher for longer’ lumber prices (particularly higher [spruce, pine and fir] prices), we feel more comfortable recommending WFT.”
The analyst community broadly sees further upside in the stock, though the consensus view has West Fraser rising more modestly over the next twelve months. The stock has three buys, four holds and not a single sell rating, with an average target price of $101.57.