CA - West Fraser Timber: Low Valuation And Strong Balance Sheet Point To Rising Share-Price

2024-01-01 19:13:07 ET

Summary

• Technical analysis suggests long-term pending buying signals, with potential for a sustained bullish trend over the next few years.
• West Fraser Timber's undervalued assets, strong balance sheet, and growth potential make it a recommended buy.
• The company's Q3 earnings beat has brought shares back up to $85+ level, indicating a bullish move.

Intro

We wrote about West Fraser Timber Co. Ltd. ( WFG ) in July of this year when we stated that momentum would continue in the lumber company after its second-quarter earnings results. Although the company's Q2 earnings miss prompted a temporary topping out in the stock price, West Fraser's convincing Q3 earnings beat which was announced at the tail-end of October has brought shares right back up to $85+ level which means overhead resistance of between $87 & 89 per share) will most likely be tested in this latest bullish move. Therefore, as we stand, WFG remains down approximately 3.85% (when we include dividend distributions) since our most recent commentary in July. We, however, are reiterating our bullish stance in WFG for the following reasons.

Technical Analysis

If we pull a long-term chart of WFG, we see that two long-term buying signals look to be at hand. The first is the MACD which is very close to giving a long-term buying signal due to the converging nature of the indicator's trendlines. MACD crossovers are especially noteworthy on long-term charts due to the dual role of the indicator (momentum & trend) as well as the sizable amount of information that gets digested in the process. Furthermore, if we can combine a MACD crossover with a crossover of the stock's 10-month-moving average above its 40-month counterpart, this would stack the odds in favor of a sustained bullish trend in WFG over the next couple of years.

Intermediate 5-Year Chart

As we see below, shares of WFG have been consolidating for almost 3 years now. Since the consolidation (rectangle formation) began to take shape after the significant upmove out of the stock's 2020 lows, we see this pattern playing itself out as a continuation pattern (bullish) over time. A decisive close above the stock's all-time highs (February'2022 highs of $99+ per share) would confirm the pattern. Furthermore, it is the height of the pattern that should interest investors in that the forecasting value would be WFG trading at $120 per share minimum if indeed a breakout is on the cards.

Investment Case

As chartists, we believe WFG's technicals are the summation of every known piece of information (be it fundamental or otherwise) on West Fraser Timber at this moment in time. Therefore, even though the recent decision to divest multiple pulp mills & buy a sawmill may not be fully updated in the company's balance sheet as of yet, the market has already digested the ramifications of how WFG continues its quest to work towards being a flagship renewable wood building supplier for its customers.

We continue to believe WFG is undervalued as outlined in its key valuation multiples below. Although the company's earnings & cash-flow multiples may not be at levels where investors would like (GAAP earnings multiple is actually negative over a trailing 12-month basis), we recommend investors focus more on how cheap WFG's assets are. As we see below, (when compared to the sector at large as well as WFG's historic averages), the company's trailing 12-month book multiple is priced at a significant discount to what we have become accustomed to in this stock.

Balance Sheet Strength

In WFG's most recent quarter, shareholder equity surpassed $7.5 million which means book value has essentially tripled since the end of fiscal 2020. Suffice it to say, when a stock is trading below book value (Book-value per share comes in at $90+ per share at present), has negative debt when the cash balance is taken into account, and is expected to grow earnings aggressively, it stacks the odds in favor of a rising share-price over time. WFG really 'made hay' when lumber prices spiked in 2021 & 2022 and although that anomaly may not happen again for some time, the company's financial position has improved no end in recent years. We reiterate our point that as long as WFG can generate enough sales (from its cheap assets) to generate earnings and cash flow, then this very same cash flow can be used to grow the company over time through investments even when lumber demand slackens off in certain periods going forward. Therefore, taking the above into account plus the company's strong forward-looking growth path, we maintain that WFG remains a 'Buy' at this moment in time.

Conclusion

To sum up, we are reiterating our bullish stance in West Fraser Timber due to its bullish technicals, strong growth curve, low valuation as well as negative debt position. We are looking for the trend concerning the company's strong EBITDA growth number in Q3 to continue into fiscal 2024. We look forward to continued coverage.

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