·8 min read
The Zacks Building Products – Wood industry is expected to benefit from strong demand in response to accelerated repair and remodel (R&R) activity despite continuous supply-chain woes. Furthermore, the U.S. housing market has been riding high, given the desire of a vast majority of the population to own a home amid the COVID-19 situation, thereby brightening the wood industry outlook. In addition, inorganic and prudent cost-containment moves are potent tailwinds. Weyerhaeuser Company WY, Louisiana-Pacific Corporation LPX, Rayonier Inc. RYN, PotlatchDeltic Corporation PCH and Boise Cascade Company BCC are set to benefit from the increasing demand arising from strong housing/R&R activities.
The Zacks Building Products – Wood industry includes forest product companies and manufacturers of lumber as well as other wood products that are used in home construction, repair and remodeling along with the development of outdoor structures. Companies in the industry design, manufacture, source, and sell flooring products like tile, wood, laminate, vinyl, and natural stone flooring products as well as decorative and installation accessories. The industry players are also involved in the manufacturing and distribution of wood and plastic composite products along with related accessories mainly for residential decking and railing applications. The industry also includes timberland real estate investment trust or REITs.
3 Trends Shaping the Future of Building Products - Wood Industry
Resilient Housing & Repair & Remodeling Markets: The industry’s prospects are highly correlated with the U.S. housing market conditions. Although the housing market has slowed down a bit, the same still remains hot, courtesy of higher demand and supply shortage. Demand for housing and wood products has also been increasing, given work-from-home or stay-at-home orders amid the COVID-19 pandemic. The rising demand arising from single-family housing construction activity has been aiding the wood industry participants. This is expected to benefit the wood industry players’ entire mix of businesses, including lumber, Oriented Strand Board (OSB) and timber. Also, the industry stands to benefit from accelerated repair and remodeling activity. Despite the pandemic-related challenges, the R&R market (considered one of the largest in terms of lumber demand) has been going strong. Amid “work-from-home” or “stay-at-home” orders, consumers are prioritizing home improvement projects that are driving demand. Also, increased government spending on infrastructure projects bodes well.
Acquisitions, Product Innovation & Efficient Cost-Reduction Strategies: The companies also bank on acquisitions and divestitures to expand as well as improve portfolio quality. New products continue to be an important top-line driver for the industry players. Also, efforts to introduce products are likely to have helped the players. Again, in a bid to reduce costs, companies have been reducing the cost structure of their facilities through Lean Six Sigma efforts, sale or shutdown of underperforming units and manufacturing facilities as well as investments in technology. Also, the industry players have been focusing on operational excellence, comprising merchandising for value, harvest, and transportation efficiencies, and flexing harvest to capture seasonal and short-term opportunities.
Rapid Lumber Market Swings & Supply Chain-Related Challenges Weigh on Margins: Historically, volatility in lumber prices has been a major concern for the wood industry. Any unusual rise in the cost of lumber products sold by primary producers increases the cost of inventory and limits margins on fixed-priced lumber products. Yet, a decline in costs eats into profits as products sold are indexed to the current lumber market. Meanwhile, the timberland business is governed by federal rules and state forestry commissions, which are subject to frequent changes, thereby affecting businesses. Further, due to the very nature of their properties, timberland REITs are required to follow eco-friendly mandates in their trade. Furthermore, the companies have been experiencing supply chain challenges and higher freight and transport costs. For example, resin unavailability is posing quite a challenge. The industry participants use a significant quantity of various resins in the manufacturing processes. Resin product costs are influenced by changes in the prices or availability of raw materials used to produce resins, primarily petroleum products, and the demand and availability of resin products. Shortages of resin and adhesives are likely to persist.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products – Wood industry is a 12-stock group within the broader Construction sector. The Zacks Wood industry currently carries a Zacks Industry Rank #47, which places it in the top 19% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates impressive near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since December 2021, the industry’s earnings estimates for 2022 have been revised upward to $2.93 per share from $2.62.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector, Lags S&P 500
The Zacks Building Products – Wood industry has outperformed the broader Zacks Construction sector but lagged the Zacks S&P 500 composite over the past year.
Over this period, the industry has gained 11.4% compared with the S&P 500 and the broader sector’s 12.2% and 3.4% growth, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing wood stocks, the industry trades at 18.6X versus the S&P 500’s 19.8X and the sector’s 12.6X.
Over the last five years, the industry has traded as high as 42X, as low as 14.8X and at a median of 24.9X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
5 Wood Stocks to Buy Now
We have selected five stocks from the Zacks universe of wood stocks that currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Boise Cascade Company: Based in Boise, ID, this Zacks Rank #1 company makes wood products and distributes building materials in the United States as well as Canada. Higher commodity wood products pricing and robust construction activity have been aiding it to deliver strong results. Building Materials Distribution and Wood Products segments are gaining strength from strong end-product demand (particularly for EWP) as well as higher commodity product prices. It has also been increasing commodity offerings that will instill growth in the existing markets, underserved markets and across its entire national footprint.
Importantly, Boise Cascade — which has gained 51.5% in the past year — has seen a 10.6% upward estimate revision for 2022 earnings over the past 30 days.
Price and Consensus: BCC
PotlatchDeltic: Headquartered in Spokane, WA, PotlatchDeltic is a leading Real Estate Investment Trust (REIT). The company’s Timberlands and Wood Products businesses have been benefiting from the recent surge in lumber prices. Higher demand for BCC’s products arising from positive housing-related fundamentals and continued higher lumber prices should lend support for growth.
PotlatchDeltic, a Zacks Rank #1 stock, has gained 0.6% over the past year. PCH has seen a 38.3% upward estimate revision for 2022 earnings over the past 30 days.
Price and Consensus: PCH
Weyerhaeuser: Based in Seattle, WA, this company is one of the world's largest private owners of timberlands. Its focus on operational excellence is expected to drive growth. Again, U.S. housing and R&R market recovery is raising hopes. Focus on operational excellence and efforts to boost financial flexibility enabled it to generate solid cash flow and strengthen the balance sheet. The company remains optimistic about its performance due to persistent strength in residential construction, a stable financial position and funds available for distribution.
Weyerhaeuser, a Zacks Rank #1 stock, has gained 17.2% over the past year. WY has seen a 27.4% upward estimate revision for 2022 earnings over the past 30 days.
Price and Consensus: WY
Rayonier: Jacksonville, FL-based Rayonier Inc. is a leading pure-play timberland REIT. With a solid portfolio of timberlands in some of the most productive timber-growing regions of the Southern United States, Pacific Northwest and New Zealand, this company remains well positioned to capitalize on robust domestic demand trends, thereby improving export market conditions and leading to a favorable pricing environment. It also remains focused on adding high-quality timberlands to its portfolio through acquisitions.
The consensus estimate for the Zacks Rank #2 Rayonier’s 2022 earnings has witnessed an upward revision of 3.4% in the past 30 days. The stock has gained 5.9% in the past year.
Price and Consensus: RYN
Louisiana-Pacific: Headquartered in Nashville, TN, this company manufactures building products, primarily for use in new home construction, R&R as well as outdoor structure markets. Strong Siding Solutions (formerly known as SmartSide) revenues and an increase in OSB pricing will boost Louisiana-Pacific’s bottom line despite the ongoing headwinds from raw material prices and availability. Operational efficiency and cost-containment efforts are also encouraging.
Louisiana-Pacific currently carries a Zacks Rank #2. The consensus estimate for 2022 earnings has witnessed an upward revision of 3.5% in the past 30 days. LPX’s shares have gained 54.7% in the past year.
Price and Consensus: LPX
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report