West Fraser Timber Co Ltd (WFT:TOR) Analysis

West Fraser Timber Co. Ltd. is a Canadian company that has been operating since 1954 and produces lumber, panels, laminated veneer lumber, pulp, newsprint, wood chips and energy. It operates through subsidiaries and joint ventures in British Columbia, Alberta and the southern United States. Its operations in Western Canada manufacture all products except lumber. Its sawmills in the southern United States produce lumber and wood chips. The company has 8,600 employees and is the largest lumber producer in North America.

Valorization

WFT is trading at a fair price, at 11.2 times recurring earnings, 4.6 times tangible book value, 1.3 times sales and 11.8 times free cash flow. As for the dividend, let's say politely that West Fraser is not shining with its generosity, since the yield is only 0.37%. That being said, it should be noted that the distribution ratio is extremely conservative, at 4.2% relative to earnings and 4.4% relative to free cash flow. The big Canadian lumberjack, which is tight on its pennies, therefore has enormous room to continue to increase its distributions in the future. The dividend remained static between 2013 and 2016, but was increased in 2017 and will be increased again in 2018. Perhaps a sign of a new wave of charity...

Balance sheet & result

Just like the dividend (and especially much more), profits, cash reserves and asset values are growing over the long term, which proves the solidity of the Canadian company's business model. West Fraser clearly succeeds in creating value for its owners and this is reflected in the share price which has increased fivefold over the last ten years. The price has even increased 17-fold over the last thirty years...

Cash reserves are comfortable, with a current ratio of 2.2 (up) and a reduced liquidity ratio of 1.07. WFT therefore has no worries about meeting its current financial obligations. Gross margin is also up, even notable, at 39%, for an appreciable free cash flow margin of 11%. Also up, return on assets is also remarkable, at 13.2%, for an impressive cash flow return on assets of 20%. One wonders if West Fraser is not printing counterfeit notes with its paper pulp...

The long-term debt ratio to assets is slightly up, at 14.08%. Nothing to worry about, however, given the Canadian's impressive ability to produce cash. The company would indeed be able to repay its entire debt in one year by using its free cash flow. As for the number of shares outstanding, it even tends to decrease in the long term, which is obviously positive for shareholders by concentrating the assets at their disposal.

Conclusion

West Fraser is admittedly a bit stingy with its dividend. But when you see what a slot machine it is, you can honestly turn a blind eye to this drawback, while hoping that its management will come to better intentions in the future. In the worst case, you can console yourself with the added value of the share price.

WFC clearly has a bright future ahead of it. It is solid and relatively safe from new competitors due to its size and the know-how and all the resources needed to carry out its activity. The sector is also rather defensive in nature, which is confirmed by a beta of WFT slightly below 1. The business is also safe from technological obsolescence. It is therefore a stock that can be easily bought and forgotten in a corner.

I believe the stock is currently trading at a price that is fairly reflective of its intrinsic value, with perhaps a slight undervaluation. It is a bit expensive from a tangible asset value perspective, but quite cheap from an earnings perspective, especially considering its strength and profitability.

So I just took a position on WFT.