West Fraser Earnings: Lower Lumber Prices Continue To Weigh on Financial Results

No-moat-rated West Fraser WFG reported first-quarter results that were largely in line with our expectations as low lumber prices weighed on results despite relatively stable lumber shipments. Revenue declined 47% year over year as West Fraser’s lumber and EWP (engineered wood products) businesses both saw steep declines. Additionally, West Fraser posted an $84 million operating loss, continuing the trend from the fourth quarter even though lumber prices rose slightly sequentially. We’ve decreased our fair value estimate for New York Stock Exchange and Toronto Stock Exchange-listed shares to $92 from $104, and CAD 125 from CAD 139 per share, respectively, due to our expectation of lower lumber prices through 2023 than we had previously anticipated.

West Fraser’s lumber business reported a 50% decrease in revenue year over year, while the segment posted a $48 million operating loss. Nevertheless, revenue was up 8% sequentially while the operating loss was roughly $112 million less than that in the fourth quarter. This was largely attributable to higher shipments during the quarter due to strong repair and remodel performance, somewhat offset by a slowdown in new residential housing. The North American EWP segment faced similar challenges in the quarter, with revenue decreasing 55% year over year. Despite higher shipments for oriented strand board, drastically lower prices led to a significant decline in revenue and a $38 million operating loss for the segment.

Lumber prices remained low during the quarter and have shown no signs of improvement through the first weeks of April. Capacity curtailments announced in the second half of 2022 provided near-term relief, but prices retreated once again amid ample domestic supply, imports from Europe, and softening new residential demand. Barring significant curtailments, we expect lumber prices to remain at lower levels through the end of the year as demand remains constrained amid reduced new residential construction.