The Zacks Building Products – Wood industry is expected to benefit from strong demand in response to accelerated repair and remodel (R&R) activity. Furthermore, the U.S. housing market has been riding high, given the desire of a vast majority of population to own a home amid the COVID-19 situation, thereby brightening the outlook for the wood industry. Apart from this, higher lumber prices, and inorganic as well as prudent cost-containment moves are potent tailwinds.
Weyerhaeuser Company (WY), PotlatchDeltic Corporation (PCH), Masonite International Corporation (DOOR), UFP Industries (UFPI) and Louisiana-Pacific Corporation (LPX) are set to benefit from 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 also design, manufacture, source and sell flooring products. The industry also includes timberland real estate investment trust or REITs.
4 Trends Shaping the Future of Building Products – Wood Industry
Resilient Housing Market: The industry’s prospects are highly correlated with the U.S. housing market conditions. Markets have been showing resilience of late on major data points, given low mortgage rates despite persistent economic uncertainties and high unemployment arising from the pandemic. Demand for housing and wood products has also been increasing, given the work-from-home or stay-at-home orders amid the COVID-19 pandemic. The remarkable recovery in single-family housing construction and repair/remodel activity has been leading to rise in lumber prices. This is expected to benefit the wood industry players’ entire mix of businesses, including lumber, Oriented Strand Board (OSB) and timber.
Solid Repair & Remodeling Market: The industry stands to benefit from accelerated repair and remodeling activity. Despite the uncertainties arising from the pandemic, the R&R market (considered one of the largest in terms of lumber demand) has been going strong. Amid the “work-from-home” or “stay-at-home” orders, consumers are prioritizing home improvement projects that are driving demand. Also, companies have been experiencing higher demand for exporting southern yellow pine logs to China, as waivers for the 25% tariff has been granted. 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 and 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 its facilities through Lean Six Sigma efforts, the 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, along with flexing harvest to capture seasonal and short-term opportunities.
Rapid Lumber Market Swings: 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. However, 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.
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 #32, which places it in the top 13% 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 bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
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 & S&P 500
The Zacks Building Products – Wood industry has outperformed the broader Zacks Construction sector and Zacks S&P 500 composite over the past year.
Over this period, the industry has gained 33.9% compared with the S&P 500’s growth of 20.7% and the broader sector’s 25.3% rally.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings, which is a commonly used multiple for valuing wood stocks, the industry trades at 25.8X versus the S&P 500’s 23.2X and the sector’s 17.6X.
Over the last five years, the industry has traded as high as 41.1X, as low as 16.7X and at a median of 24.2X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
5 Wood Stocks to Keep a Close Eye On
Weyerhaeuser Company: 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. This Zacks Rank #1 (Strong Buy) stock has gained 10% in the past year. The Zacks Consensus Estimate for 2021 earnings has witnessed an upward revision of 6.4% in the past 30 days, depicting optimism over the company’s prospects.
Price and Consensus: WY
PotlatchDeltic Corporation: This is an American diversified forest products company based in Spokane, WA. It currently sports a Zacks Rank #1, and is benefiting from solid performance of Timberlands as well as Wood Products segments. The company highlighted that strong housing fundamentals and R&R activity point to a solid outlook for lumber pricing, given persistent growth in lumber demand. This apart, strong liquidity is expected to be a major tailwind. The stock has gained 21.2% in the past year. The consensus estimate for 2021 earnings has witnessed an upward revision of 13.8% in the past 30 days.
Price and Consensus: PCH
Masonite International Corporation: This Tampa, FL-based company manufactures, and distributes interior as well as exterior doors. This Zacks Rank #2 (Buy) company is expected to generate higher EBITDA owing to the pricing strategy adopted in the North American residential as well as the Architectural segments. Moreover, the benefits of prior restructuring actions and COVID-19 cost-saving measures implemented late in first-quarter 2020 will serve as other positives. Importantly, Masonite has seen 1.9% upward estimate revision for 2021 earnings over the past 30 days. The stock has gained 38.7% in the past year, performing better than the industry’s 33.8% rally. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: DOOR
UFP Industries: Headquartered in Grand Rapids, MI, UFP Industries supplies wood, wood composite and other products in retail, industrial, and construction markets. The increase in home improvement activity resulting from stay-at-home orders has been benefiting its Retail segment. Moreover, expansion of the product portfolio through acquisitions and product innovations is noteworthy. The stock has gained 22.7% in the past year. The consensus estimate for this Zacks Rank #2 company’s 2021 earnings has witnessed an upward revision of 14.2% in the past seven days.
Price and Consensus: UFPI
Louisiana-Pacific Corporation: Headquartered in Nashville, TN, this company manufactures building products, primarily for use in new home construction, R&R, and outdoor structure markets. Strong SmartSide strand revenues, increase in OSB pricing and favorable wood fiber as well as resin costs will boost Louisiana-Pacific’s bottom line. Operational efficiency and cost-containment efforts are also encouraging. This Zacks Rank #2 company’s consensus estimate for 2021 earnings has witnessed an upward revision of 7.2% in the past 30 days. The stock has gained 28.8% in the past year.
Price and Consensus: LPX
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