You could say that lumber is one of the backbones of the Canadian economy.
Lumber isn't just tied to the housing market. The sector touches almost every area of the country. The Maritimes have a vibrant lumber industry, thanks to lush forests in rural New Brunswick.
Ontario and Quebec have seemingly limitless forests north of significant cities. Western Canada also has enormous pockets of lumber, which is especially valuable to British Columbia and Alberta.
According to Natural Resources Canada, more than 345,000 people were directly or indirectly employed by the Canadian lumber industry in 2021. Collectively, these folks were paid approximately $11 billion in wages.
Lumber is a big part of the Canadian economy. But with volatile prices, plenty of competition, perhaps weaker housing starts (caused by elevated mortgage rates) and other issues like the United States and Canada lumber trade wars impacting the industry, is it a safe place for investors? Let's take a closer look.
What are the best Canadian lumber stocks?
West Fraser Timber (TSE:WFG)
That makes it one of the best-performing Canadian lumber stocks during that period.
West Fraser has consistently grown book value and earnings per share, too. Book value increased from US$1.5 billion in 2012 to over US$7.5 billion today. Earnings per share increased from $0.90 a decade ago to more than $27 per share in 2022. Analysts believe the company's earnings will fall to approximately $1 per share in 2023, although the bottom line is expected to recover to almost $4 per share in 2024 and rise above $10 per share in 2025. Predicting the earnings of a lumber stock is notoriously difficult since it all depends on the underlying price of the commodity.
The company also has a pristine balance sheet, which includes more than $1.2 billion cash balance versus just $530 million debt. It's well-positioned if 2024 is bad for the housing market.
As of today's writing, West Fraser has a dividend yield of 1.6%.
Canfor Corporation (TSE:CFP)
Perhaps the most exciting thing about Canfor (TSX: CFP) is its largest shareholder. Legendary investor Jim Pattison owns over half of this Canadian lumber stock. It's good to have investing royalty on your side.
Canfor is a diversified operation with 38 sawmills, 4 pulp & paper mills and 16 plants dedicated to value-added activities -- like manufacturing parts for modular homes or wood chips. It's also in the newsprint business.
Despite the company's serious progress, shares have been flat over the last decade. This makes the stock an excellent buy today, as the market hasn't caught up with the company's improved fundamentals.
For example, Canfor had a book value of approximately $9 per share at the end of 2012. These days, book value is just over $32 per share. Canfor's balance sheet is also in great shape, with over $800 million in cash and just $418 million in debt.
Earnings have also exploded over the last decade, increasing from $0.18 per share in 2012 to $10.74 in 2021. The bottom line has fallen significantly since, especially in the past year. But shares are trading at a three-year low as of this writing, which, historically, has been a pretty good time to buy most stocks.
Western Forest Products (TSE:WEF)
Its size isn't the only reason Western Forest could be acquired soon. Shares have also underperformed lately, falling from a high of nearly $3 each in 2018 to less than $0.70 at the time of writing.
It's always a good idea to buy when assets are depressed. Analysts agree the stock is depressed, too; they have a target price of $0.85. That's an upside potential of more than 20%.
The company has assets along the Pacific coast, with sawmills and remanufacturing facilities in B.C. and Washington State. These assets would make an excellent addition for most Canadian lumber companies since they're closest to Asia -- a significant export market.
Western Forest isn't as cash-rich as many other Canadian lumber stocks since it's currently digesting an acquisition of its own, which was completed in September 2022. But it trades at a steep discount of approximately 40% of its stated book value. Earnings are expected to recover in 2024 after a lacklustre year in 2023. However, as I mentioned, predicting the company's profit in 2024 is virtually impossible without knowing lumber prices.
Interfor Corp (TSE:IFP)
What I especially like about Interfor Corporation (TSX:IFP) is this Canadian lumber stock is a pure-play lumber producer. It doesn't dabble in the value-added product space.
Interfor has been around for a long time, operating since 1980. More recently, it has been a growth machine, increasing its top line from $850 million in 2012 to more than $4.5 billion in 2022. Revenue will fall in 2023 and 2024 before returning to growth mode whenever the commodity recovers.
Earnings per share also saw similar growth, soaring from a loss of 17 cents per share a decade ago to a profit of $10.95 per share in 2022. This also illustrates how robust a lumber bull market can be to these companies' earnings.
Analysts estimate earnings will fall significantly in 2023 and 2024, with the company expected to lose money yearly.
Interfor is a consistently excellent operator. It has increased lumber production by an average of 12% annually since 2012. It is a diversified operator with assets in B.C., Ontario, Quebec, and eight U.S. states. U.S. assets are essential since they're not subject to tariffs. The company's nearly 5 billion board feet of annual capacity also put it in the top four producers in North America.
Stella Jones (TSE:SJ)
Let me explain. Stella Jones produces utility poles, railroad ties, and residential lumber products. These areas are more consistent than the boom and bust cycles that plague the lumber industry. Railway ties are not linked to the Canadian housing market.
Stella Jones has increased its revenue by more than 400% over the last decade, boosting the top line from $717 million in 2012 to over $3 billion in 2022. This growth rate was consistent, too, with the full line increasing every year.
Earnings also chugged higher, increasing from $1.13 to $3.62 per share in the same time frame. Unlike every other Canadian lumber stock on this list, the company's earnings are projected to increase to $5.56 per share in 2023 and grow to $5.77 per share in 2024. Even though Stella Jones shares have done very well lately -- with the stock at close to an all-time high as I write this -- the stock still trades at less than 20x 2023's expected earnings.
The company has more than 40 production facilities spread across North America, further illustrating its diverse customer base. It also can make future acquisitions to grow the company, particularly in the utility pole and residential lumber space.
Finally, Stella Jones pays a consistently rising dividend. The current payout is $0.92 per share, good enough for a just over 1% yield. The premium has increased by an average of 14% per year since 2015, and the payout is still well within the target of under 30% of earnings. Its consistent dividend growth makes Stella Jones a Canadian dividend aristocrat club member.
Lumber prices have been extremely volatile
Canadian lumber stocks have made international headlines over the last couple of years as the underlying commodity has spiked in price several times. After predictably dipping as the pandemic started, lumber prices spiked to more than US$900 in July 2020. They spiked again in 2021, hitting a high of more than US$1500 and again in 2022, although the most recent spike peaked at around US$1250.
Lumber settled in early 2023 before trending slightly lower as 2023 has gone on, making today a great time to get into these best lumber stocks. The time to buy is when lumber is down, not high.