Recent lumber price volatility wasn't enough to dampen high expectations for forestry's second-quarter results – and postings from West Fraser Timber (TSX:WFT) and Canfor (TSX:CFP) didn't disappoint.
Analyst Daryl Swetlishoff of Raymond James in Vancouver made a bullish call on forestry stocks in a July 11 note released prior to the string of results announcements.
"We came out aggressively saying they [would] beat [the street], and we put strong buys on the stocks," Swetlishoff told Business in Vancouver on July 22, prior to Canfor's second-quarter report. "The stocks are up about 10%, 12% since then because West Fraser reported on [July 18] and they beat [expectations], so they're setting the tone."
West Fraser reported earnings of $109 million on sales of $900 million for 2013's second quarter. In the first quarter, the company earned $67 million on sales of $863 million.
However, operating earnings for West Fraser's lumber operations were down $19 million compared with the previous quarter – the result, the company said, of "sharply reduced prices" for lumber during Q2.
On July 24, Canfor reported earnings of $110 million on sales of $843 million. Despite the steep drop in lumber prices over from April to June, the company said their "average sales realizations" were mostly unchanged from the first quarter.
Canfor attributed this to more stable offshore pricing and a higher proportion of sales made in the first quarter.
Lumber prices soared in the first quarter, reaching nearly $450 per board foot at one point. Prices then plunged throughout April, May and June, ultimately falling to $320. The per-board-foot price now sits at $340.
Companies like West Fraser and Canfor are experiencing a "lingering benefit" from the first-quarter rally, said David Elstone, an analyst at Gibsons-based Equity Research Associates.
"What we are not expecting is a sharp rebound back to the previous peak," said Elstone.
He added that throughout the third quarter he'd be watching for such factors as:
•an expected rise in the cost of B.C. logs;
•whether strong demand from China, which has returned after falling off in the first quarter, would continue; and
•upcoming labour agreements in some B.C. mills that are up for renewal at the end of July.
"One of the bigger questions is what's happening with China … We're seeing an uptick now that could be a bit of an inventory restocking, which I think is what's happened throughout the whole system."
Elstone also questioned whether the housing rebound in the U.S. would meet expectations.
"We're definitely seeing an improvement in prices, but my view is we're not going to break a million housing starts this year [in the U.S.]."
Swetlishoff said his optimism is based on the combination of returning demand from China and the U.S. housing market rebound. In June, U.S. new home sales rose to a seasonally adjusted rate of 497,000, the highest level since May 2008.
"We still expect 1.1 million housing starts in the U.S. in 2014. If that comes to pass, it would be difficult to see lumber prices staying at the $340 range. We're using $380 for 2014."
