West Fraser Earnings: Near-Term Headwinds Mount Amid Lower Lumber Prices and Tepid Demand

No-moat-rated West Fraser WFG reported second-quarter results that were largely in line with our expectations. Revenue decreased roughly 44% year over year as all four primary segments saw substantial double-digit declines. Wood product markets continue to face a challenging operating environment in North America as higher interest rates and persistent inflation weigh on lumber demand. Additionally, lumber prices have remained well below pandemic-era highs and have shown few signs of improvement through the first half of the year. Nevertheless, we are maintaining our fair value estimate for New York Stock Exchange listed shares of $92 but decreasing our fair value estimate of Toronto Stock Exchange-listed shares to CAD 121 from CAD 125 per share due to a decrease in the USD/CAD exchange rate.

West Fraser saw continued weakness in its lumber business during the quarter, with the segment reporting a 45% decrease in revenue year over year and a $41 million operating loss. Despite higher shipments during the quarter amid a slight uptick in demand, lower lumber prices continued to weigh heavily on the segment. The North America EWP segment was the bright spot in the quarter as it earned a roughly $58 million operating profit despite a 46% decline in revenue year over year. Both were improvements sequentially due to higher than expected OSB shipments but were somewhat offset by lower OSB prices. While this is an encouraging development in an otherwise underwhelming quarter, we expect higher mortgage rates will pressure OSB prices in the second half of the year.

West Fraser continues to navigate a challenging operating environment as high interest and mortgage rates have weighed on demand while low lumber prices have exacerbated losses. While management noted European lumber imports have slowed, which should provide some relief to lumber supply, we expect ample domestic production will likely restrict lumber price growth through the remainder of the year.