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Morningstar | Favorable demographics and labor markets are set to boost lumber and panel sales for West Fraser.

West Fraser Timber is one of the largest softwood lumber producers in the world, with over 7 billion board feet of production capacity in western Canada (63% of the total) and the Southeastern United States (37%). The company's panel business produces plywood, medium-density fiberboard, and laminated veneer lumber. North American homebuilding and remodeling are West Fraser's key end markets, although it exports significant volume to China, constituting 8% of lumber sales in 2017.West Fraser sees dramatic profit variations depending on the health of the U.S. housing market. After seven lean years for residential construction, we expect favorable demographics, a tighter labor market, and looser mortgage availability to catalyze a major improvement in homebuilding activity over the coming decade. We forecast U.S. housing starts peaking at 1.9 million in 2021 as pent-up demand is unleashed, before fading to a demographically sustainable 1.5 million in 2026.We forecast robust profit growth for West Fraser's lumber and panel businesses, accounting for around 80% of revenue. We see lumber and panel adjusted EBITDA rising to roughly CAD 1.8 billion in 2021 from about CAD 1 billion in 2017, excluding tariffs, as the housing cycle turns in West Fraser's favor. Margins swell to the high 20s from 24% over the same interval. We expect more muted profitability on a midcycle basis, with margins fading to roughly 20% as housing normalizes and heady profits attract new supply.Despite challenging market conditions, West Fraser has been reinvesting in its business with an eye on housing recovery. Management has been executing capital plans to bolster its cost position. Meanwhile, the company bought lumber capacity in the Southeastern U.S. and Alberta, amplifying exposure to a U.S. housing upturn and reducing reliance on western Canadian mills, which will struggle with timber availability due to the mountain pine beetle's devastation of regional forests.West Fraser’s pulp segment accounts for about 20% of revenue. We assume EBITDA margins will fade from recent highs as old corrugated containers become viable competition for export business again.