West Fraser Sandwiched Between Healthy Markets And Trade Policy Uncertainties

After a tough decade, things have at last turned up for lumber company West Fraser (OTCPK:WFTBF) (WFT.TO) and its peers. Operating rates in North American have been in the vicinity of 90% and housing starts have been slowly grinding higher. What's more, the company's own constant focus on costs and self-improvement has positioned it to make the most of the upturn in demand.

The "but" is the uncertainty regarding trade policy between the U.S. and Canada. West Fraser is a Canadian company, and while it produces about 40% of its lumber in the U.S., that leaves another 60% vulnerable to potential tariffs. My base case is that the outcome of this trade dispute is not crippling to West Fraser, Canfor (OTC:CFPUF) (CFP.TO), or Interfor (OTC:IFSPF) (IFP.TO) (nor unfair to Weyerhaeuser (NYSE:WY)), and that West Fraser's shares are currently priced at a bit of a discount on the assumption that there's a continuing build toward 1.6M to 2.0M housing starts in 2019/2020.

While West Fraser's ADRs do have the dreaded "F," they do offer some liquidity. The Canadian shares are far more liquid, though, and most brokers facilitate trading on Canadian exchanges without too much difficulty.

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West Fraser Sandwiched Between Healthy Markets And Trade Policy Uncertainties

Underlying Value And Housing Growth Support Weyerhaeuser

Weyerhaeuser (NYSE:WY) is a good example of a stock where it can be challenging to nail down the fair value. Cash flow doesn't necessarily account for the underlying value of the timberland and can miss the cyclicality of the housing cycles, but sum-of-the-parts net asset valuations can require a lot of work to find reasonable inputs/comparables for timberland valuation. Be that as it may, I think Weyerhaeuser offers decent value today on the strength of its extensive timberland assets and the improvements the company has made not only toward streamlining and focusing the business, but also in improving operating margins in the manufacturing operations.

It's been a while since I've updated my coverage on this company, but I think $30 to $35 a share is a reasonable (albeit wide) range for Weyerhaeuser shares, with $35 as the "sweet spot" on the basis of my sum-of-the-parts valuation. A trade war with Canada over lumber is a looming issue, but one that shouldn't hurt Weyerhaeuser, and I like the company's leverage to increasing housing activity albeit with some caution on what would be a potential oversupply of lumber into the market in the coming years.

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Underlying Value And Housing Growth Support Weyerhaeuser