Why Is West Fraser Timber (TSX:WFG) Stock up 22%?

West Fraser Timber (TSX:WFG)(NYSE:WFG) could be a potential acquisition target.

| More on:
forests trees

Image source: Getty Images

Canada’s commodity sector is red hot right now. Two years of volatility have left these stocks in an odd position. Unsurprisingly, institutional investors are taking advantage of these distortions and snapping up acquisition targets. Lumber giant West Fraser Timber (TSX:WFG)(NYSE:WFG) looks like the latest target. 

West Fraser stock is up 25% this morning as a private equity firm announced its intention to acquire the company. CVC Capital and wood panel manufacturer Kronospan have announced joint negotiations to purchase West Fraser. 

Here’s a closer look at the potential deal and what this means for investors seeking undervalued bets in the commodity market. 

West Fraser acquisition

West Fraser’s market value is closely correlated with the price of its underlying product: lumber. Lumber prices skyrocketed during the pandemic, as consumers spent excess savings on home improvement projects. Since then, the boom has ended. Lumber is trading 56% below its all-time high. In fact, it’s trading at the same level as it was in 2018. 

Unsurprisingly, this bust pushed West Fraser’s stock lower. The company lost nearly a fifth of its market value since the start of 2022. Last month, the stock was trading at just 2.5 times earnings per share and 0.82 times book value per share. Put simply, it was deeply undervalued, despite lower lumber prices. 

That’s probably why CVC and Kronospan want to acquire the firm. The deal hasn’t been finalized yet, but it’s likely that the final acquisition price will be much higher than West Fraser’s market value from yesterday’s close. This is why the stock is surging 22% this morning. 

Other undervalued stocks

Vancouver-based Canfor (TSX:CFP) is just as undervalued right now. The company is West Fraser’s smaller rival. The stock trades at just 2.2 times earnings per share. If West Fraser is acquired for a premium in the near future, it could raise the industry’s valuation metrics and push stocks like Canfor higher. Indeed, Canfor could also be a potential acquisition target at these levels. 

Investors can also expect some consolidation in the energy sector. Oil and gas prices have been just as volatile as lumber, which means energy producers are potentially mispriced right now. 

Mid-cap companies like Tamarack Valley Energy (TSX:TVE) are trading at a discount. The stock has lost 35% of its value since June and is now trading at just 3.9 times earnings per share. Earnings could be much higher in the year ahead if the price of crude oil remains around US$100. Even if oil drops to US$70, companies like Tamarack Valley could generate substantial free cash flows. 

Canadian energy companies have committed to rewarding shareholders instead of investing in expansion this year. The sector is deploying nearly all of its excess cash flow into either paying down debt, buying back stock or boosting dividends. However, mergers and acquisitions could be a potential strategy to expand earnings without investing in risky infrastructure. Keep an eye on this trend in the energy sector. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Investing

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Bank Stocks

Best Stock to Buy Right Now: TD Bank or Manulife Financial?

Manulife continues to see momentum in its business and stock price, while TD Bank stock remains down and out.

Read more »

cloud computing
Tech Stocks

3 No-Brainer Tech Stocks to Buy With $1,000 Right Now

These three Canadian tech stocks could be among the best growth opportunities in the market right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

Canadian Dollars bills
Metals and Mining Stocks

2 Cheap Canadian Stocks Under $20 to Buy This November

Cheap TSX stocks such as Endeavour Silver are trading at an attractive valuation in November 2024.

Read more »

happy woman throws cash
Tech Stocks

3 Growth Stocks That Could Be Long-Term Wealth Creators

These three growth stocks aim to grow their financials at a higher rate than the industry average, thus delivering superior…

Read more »

how to save money
Bank Stocks

This 5.9% Dividend Stock Pays Cash Every Month

First National Financial (TSX:FN) has a 5.9% yielding dividend that is paid out monthly.

Read more »

gift is bigger than the other
Investing

The Best Canadian Stocks to Buy With $5,000

These Canadian companies have solid growth prospects and the ability to deliver profitable growth even at a large scale.

Read more »