5 Top Stocks to Buy on Robust Wood Industry Trends
The Zacks Building Products – Wood industry is expected to benefit from higher demand across export markets, accelerated repair and remodel (R&R) activity and more funding for carbon/ESG-related projects despite continuous supply-chain woes and lower lumber prices. In addition, inorganic and prudent cost-containment moves should lend support to industry players like Weyerhaeuser Company WY, Rayonier Inc. RYN, Louisiana-Pacific Corporation LPX, UFP Industries, Inc. UFPI and Boise Cascade Company BCC.
Industry Description
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 trusts or REITs.
3 Trends Shaping the Future of Building Products - Wood Industry
Higher Export Market Demand, More Spending on Carbon/ESG Projects & Repair & Remodeling Markets: The industry participants have been experiencing higher demand across export markets owing to the combination of diverse factors. For example, shipping and logistics challenges are pushing up the demand for North American logs in Japan. Again, trade limitations have impacted the import of Australian logs in China. Meanwhile, the Russia-Ukraine war has led to the ban of log exports from Russia. Overall, this tightening global wood market is proving conducive for some of the industry participants. Meanwhile, the companies are experiencing higher funding for carbon/ESG-related projects to pursue carbon capture and storage work. The industry’s prospects are highly correlated with the U.S. housing market conditions. Although the slowing housing market and the pandemic-related challenges are creating hurdles, the repair and remodeling or R&R market (considered one of the largest in terms of lumber demand) has been going strong. Currently, lower lumber prices are creating an opportunity to perform renovations or DIY projects, thereby aiding the wood industry participants. 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.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products – Wood industry is an 11-stock group within the broader Construction sector. The Zacks Wood industry currently carries a Zacks Industry Rank #35, which places it in the top 14% 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 a 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 April 2022, the industry’s earnings estimates for 2022 have been revised upward to $4.06 per share from $3.71.
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 the Zacks S&P 500 composite over the past year.
Over this period, the industry has lost 8.5% compared with the S&P 500 and the broader sector’s 9.8% and 18.8% decline, 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 12.62X versus the S&P 500’s 16.19X and the sector’s 9.93X.
Over the last five years, the industry has traded as high as 40.25X, as low as 12.62X and at a median of 23.42X, 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.
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, more home improvement and R&R markets activities are raising hopes. Focus on operational excellence and efforts to boost financial flexibility enabled it to generate solid cash flow and strengthen the balance sheet. Weyerhaeuser remains optimistic about its performance despite persistent supply-chain issues, the recent uptick in mortgage rates and ongoing affordability concerns in the housing market, given favorable demographics, and a decade of underbuilding and historically low inventory for new and existing homes.
Weyerhaeuser, a Zacks Rank #1 stock, has dropped 1.9% over the past year. Yet, WY has seen an 18.5% upward estimate revision for 2022 earnings over the past 60 days. The positive estimate revisions depict analysts' optimism over the company’s prospects.
Price and Consensus: WY
Boise Cascade Company: Based in Boise, ID, this Zacks Rank #2 company makes wood products and distributes building materials in the United States as well as Canada. Boise Cascade’s 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 12.6% in the past year — has seen a 22.3% upward estimate revision for 2022 earnings over the past 60 days.
Price and Consensus: BCC
Louisiana-Pacific Corporation: 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. LPX’s shares have lost 3.1% in the past year. Nonetheless, the consensus estimate for 2022 earnings has witnessed an upward revision of 14.2% in the past 60 days.
Price and Consensus: LPX
Rayonier: Jacksonville, FL-based Rayonier 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 higher 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 Zacks #2 Ranked Rayonier’s 2022 earnings has witnessed an upward revision of 4.8% in the past 30 days. The stock has gained 6.3% in the past year.
Price and Consensus: RYN
UFP Industries: Headquartered in Grand Rapids, MI, UFP Industries supplies wood, wood composite and other products in retail, industrial, and construction markets. An increase in home improvement activity resulting from stay-at-home orders has been benefiting UFP Industries’ Retail segment. Expansion of the product portfolio through acquisitions and product innovations is also noteworthy.
This Zacks Rank #2 stock has dropped 7.2% in the past year. Nonetheless, UFP Industries’ 2022 earnings are expected to grow 16.1%.
Price and Consensus: UFPI
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