On Tuesday, Raymond (NSE:RYMD) James made a significant change to the rating of West Fraser Timber Co. Ltd. (NYSE:WFG), downgrading the company's stock from Strong Buy to Outperform. The firm also adjusted the price target for West Fraser's shares, lowering it to $115.00 from the previous $120.00. Currently trading at $89.97, the stock remains below analysts' consensus target range of $90-$125. According to InvestingPro analysis, the company maintains a "GOOD" overall financial health score.
The downgrade was based on valuation concerns and a reduction in the estimated earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year 2026. Specifically, Raymond James decreased their 2026 EBITDA estimate for West Fraser by 12%. Despite current challenges, InvestingPro data shows the company holds more cash than debt on its balance sheet, with a conservative debt-to-equity ratio of 0.08.
Despite the downgrade, Raymond James analyst Daryl Swetlishoff remains optimistic about the sector, maintaining a Strong Buy rating and Analyst Current Favorite status for Canfor (TSX:CFP) (CFP-TSX) and reiterating a Strong Buy rating for Interfor (IFP-TSX), a pure play lumber producer.
West Fraser's fourth-quarter estimates for 2024, as revised by Raymond James, are approximately 200% higher than the average Street estimates. This bullish outlook is supported by the strong performance of Canfor, Interfor, and Western, which are highlighted as standouts in the industry.
Furthermore, the analyst pointed out that the average quarterly Oriented Strand Board (OSB) prices, which stand at US$392, are favorable for West Fraser. This pricing dynamic has led Raymond James to project earnings that are 55% above the consensus for the lumber company.
In other recent news, West Fraser Timber Co. Ltd. reported mixed third-quarter earnings, with an adjusted EBITDA of $62 million. This figure reflects the impact of a $32 million lumber export duty from the previous year. Despite market challenges, the company's Engineered Wood Products (EWP) segment performed well, while the Southern Yellow (OTC:YELLQ) Pine (SYP) lumber demand remained weak. On the positive side, West Fraser showed a strong balance sheet with over $2 billion in liquidity and continues to focus on cost optimization.
In the lumber and paper sector, notable gains were observed as analysts from TD Cowen and Truist highlighted the impact of rising commodity prices and the industry's move to implement price increases in the coming year. Analysts pointed out that lumber and oriented strand board (OSB) composite prices have seen a significant uptick, jumping 25-28% from their recent lows. This increase has been accompanied by announcements from major producers about their plans to raise containerboard prices starting January 1, 2025.
A TD Cowen analyst noted that these producers have proposed price hikes in the range of $70 to $90 per ton. Additionally, a Truist Securities analyst noted that OSB pricing has been gaining strength due to prolonged mill order files and low volumes, suggesting a stronger than anticipated end to the year for companies like Louisiana-Pacific (NYSE:LPX) and Weyerhaeuser (NYSE:WY).
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