With the housing market inching back to life, West Fraser Timber is poised to see higher lumber sales translate into stronger-than-expected earnings growth.

The housing market, the financing of which via subprime lending was at the heart of the financial crisis, has, understandably enough, been one of the slowest to generate any kind of significant recovery. For most of the last decade, for instance, housing starts remained consistently about the 1.5 million a year mark, hitting a peak of 2.2 million in January 2006, only to collapse to fewer than 500,000 by January 2009. The recovery has been very slow, but in May the pace at which work began on new homes hit 708,000 units. That’s good news for companies like West Fraser Timber Ltd. (WFT.TO), which supply lumber and wood products to the housing industry. And analysts are beginning to sit up and take notice; upward revisions in estimates of late have left the company with a large Predicted Surprise of 35%, signaling that the most recent estimates and those published by top-ranked analysts are more upbeat than the consensus. That in turn indicates that the odds are in favor of West Fraser posting a positive earnings surprise when it announces its second-quarter earning next week.

In each of the last four quarters, West Fraser reported earnings that fell short of consensus estimates, and a negative Predicted Surprise ahead of the release date accurately predicted those earnings disappointments. But as the housing industry revives, the tendency of West Fraser to disappoint investors when reporting earnings seems to have reached an end at last. The current Predicted Surprise is based on the fact that the StarMine SmartEstimate, a gauge of forecasts by those analysts with the best track record and those that have been published more recently, today stands at 47 cents a share, while the I/B/E/S consensus now calls for the company to report earnings of only 35 cents a share.

Such a wide differential between the consensus and the SmartEstimate could be an early indicator that further increases in earnings estimates are in the offing, or that the company may report earnings that fall short of the consensus. More reason for optimism is the fact that the two most recent analyst estimates (one published by a four-star rated analyst and the other by a five-star rated analyst) for West Fraser are both significantly higher than the consensus. It’s reasonable for investors to heed comments made by these analysts, given their track records for accuracy and the high StarMine analyst ratings they have earned.

In the discussion of West Fraser’s operations filed with regulators alongside its first-quarter earnings, the company’s management indicated that they expected the market for lower-grade lumber from spruce, pine or fir, known as SPF lumber, to normalize. An oversupply in the industry had dented prices and corporate earnings for lumber companies. However, that doesn’t seem to be a big issue going forward as higher demand and falling inventory levels are likely to benefit the industry. That is likely to boost earnings in the coming quarters. Perhaps unsurprisingly, though, investors shouldn’t expect completely smooth sailing ahead. The company’s ability to generate earnings growth still is heavily dependent on economic growth, not only in North America but also overseas, including in its Asian markets. Still, although a worse-than-expected economic environment may put a lid on earnings growth in the coming quarters, for now, at least, investors may want to prepare to celebrate what appears likely to be a solid earnings gain when West Fraser reports its second-quarter results on July 19.

 
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