Tariffs on imported Steel and Aluminum have received the lion’s share of the press of late, and rightfully so. We recently documented the effect of rising prices on producers of steel and the benefits they are enjoying from the Trump administration’s support for domestic production.
Read the article here>>>
Somewhat less attention has been paid to the recent runup in prices for lumber, which is also benefiting from Trump’s tariffs on Canadian imports as well as a confluence of other factors – described by some in the industry as a “perfect storm” - which are all driving prices higher.
Since the advent of the Random Length Lumber futures contract on the Chicago Mercantile Exchange in 1969 and options on Lumber futures in 1987, prices for lumber have typically traded in a range between $200 and $400 with seasonal and economic factors as well as supply and demand issues dictating the price. (The price for the contract is quoted in multiples of 1,000 board feet of the types of finished boards that are used in construction – think about that pile of 2x4s in front of a new house being built.)
In terms of average monthly price, lumber topped $400 only 14 times in the 1990s and 8 times in the 2000s. Starting in 2017, however, lumber climbed above $400 and stayed there, trading north of $600 as U.S. tariffs on Canadian imports took effect in late 2017.
In addition to tariffs, the price of lumber has been supported by insect damage to live trees in the Western portions of the U.S. and Canada which has constrained supply, as well as transportation bottlenecks in the railroad and trucking industries that have been impeding the flow of finished product to the markets.
Summer is historically a strong season for lumber prices as building activity increases in much of the country during the warm months. Prices can also sometimes rise quickly during the summer hurricane season in the Southeast U.S. with large storms occasionally causing widespread damage – and precipitating widespread reconstruction.
Despite the fact that higher materials and labor prices have increased the cost of new homes, U.S homebuilding surged to an 11-year high in May in both single-family and multi-family construction. The Commerce Department's Housing Starts data released on Tuesday showed a rise of 5% to a seasonally adjusted rate of 1.35 million units, the most since 2007.
A nationwide shortage of housing, especially in large cities, combined with record-low unemployment are likely to keep homebuilding – and materials prices – elevated for the foreseeable future.
A Wide range of Lumber Products
Boise Cascade Company (BCC) operates in the U.S. and Canada as a wood products manufacturer and building materials distributor. The Company manufactures engineered wood products, plywood, lumber and particleboard and distributes wood products, such as decking, EWP, lumber, panel, particleboard, and MDF products.
After a big earnings beat in Q1 when they reported $0.94/share versus estimates of just $0.45/share, BCC has seen rapidly rising analyst estimates with the Zacks Consensus Estimate for 2018 now at $3.34/share, a full 75% higher than 2017.
Boise Cascade is very attractively valued, trading at a forward P/E ratio of just 13.7X in an industry that averages 17.6X and is a Zacks Rank #1 (Strong Buy).
Patrick Industries Inc (PATK) manufactures and distributes component products for the Recreational Vehicle, manufactured housing and marine industries. With increasing demand and higher prices for its products, Patrick Industries is growing sales at an annualized rate of over 30%. Net earnings are even better, expected to beat 2017 results by over 40% in each of the next two quarters and full-year 2018.
Share prices have been keeping pace with earnings and PATK has gained nearly 50% in the past year thanks to beating estimates in the last six quarters. The stock is still reasonably valued, trading at a forward P/E Ratio of 13X.
PATK is a Zacks Rank #1 (Strong Buy).
Better than Plywood
Norbord Inc (OSB) produces wood panels for use primarily in residential construction. As the stock ticker implies, the company’s main product is Oriented Strand Board (O.S.B.), a plywood alternative made from smaller wood pieces that is both stronger and less expensive than traditional sheet-laminated plywood. It’s also produced from younger trees, making it a more sustainable alternative. Approximately 75% of new homes are now constructed from oriented strand board, versus 25% for plywood.
With the homebuilding industry becoming increasingly cost conscious, Norbord’s products are in strong demand, saving builders hundreds – and in some cases thousands – of dollars per home.
Thanks to a building boom and higher prices, Norbord is now expected to earn $4.78/share in 2018, up from $3.55/share just 60 days ago. OSB is a Zacks Ranks #1 (Strong Buy).
Norbord also pays a hefty 4.5% dividend yield.
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