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Playing the Housing Rebound - Lumber, yes Lumber

|Includes: Eacom Timber Corp (ETRFF)

If the turnaround in housing does materialize as Warren Buffet has sugested, an excellent way to play this will be the lumber companies. 

You get the double benefit of being involved in lumber (out of favour) and housing (also out of favour). If we see a turnaround in housing, the upside should be large.

My suggestion for strong leverage on this theme is EACOM Timber.  Web site is www.eacom.ca/ and symbol is ETRFF.

EACOM is one of the major producers in the Eastern Canadian timber industry. Operations include the manufacturing, marketing and distribution of lumber and wood-based value-added products, and the management of forest resources. EACOM currently owns eight sawmills in Ontario, Saskatchewan and Quebec, one remanufacturing facility and two partnership operations. It has a production capacity of approximately 900 million board feet of lumber and holds Crown logging rights of approximately 3.5 million cubic meters annually.

EACOM purchased the sawmill assets and rights to cut timber from Domtar. They got a very good deal on this as purchased for $130 million in 2010 where Domtar had an agreement to sell for $285 million in 2007. Management is strong and the  CEO is Rick Doman, has was previously the CEO as Doman Industries, which became Western Forest Products.

It appears prices for lumber are set to move upwards regardless due to supply issues such as the BC Pine Beetle and fires in Scandanavia.  Also, global demand is growing due to increased wood usage in countries like China and Japan (after the earthquake) as wood is less prone to earthquakes.

Lumber prices are low, but this is in fact a good thing as there had been underinvestment in the lumber industry over the past several years.  Doman has stated, and there has been general industry agreement , that once US housing gets to 700,000 annualized starts, there will be lumber shortfalls and wood prices should rise significantly.  Housing starts are projected to be double this by 2012 or 2013.

EACOM - The Stock

EACOM is currrently trading at approximately $0.30.  This has fallen off significantly since a private placement was completed on
April 20, 2011, of 69,122,500 common shares sold at $0.50 per share for gross proceeds of $34,561,000.  This money was targetted to purchase another sawmill and other general purposes.  At $0.30, the opportunity is there to get the stock at a 40% discount to this

Summary

The opportunity here is to purchase stock in a company which aquired assets at a signifcant discount to their true value at a discounted stock price with exposure to an industry which has seen underinvestment for severals years.  There is a strong likelyhood that as housing turns, lumber prices will rise quickly as supply will not come on quickly and companies which can respond to this demand, like EACOM, will be well-positioned to generated above-market returns for several years.


Disclosure: I am long OTC:ETRFF.