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 the 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. Trex Company, Inc. (TREX Quick QuoteTREX - Free Report) , Louisiana-Pacific Corporation (LPX Quick QuoteLPX - Free Report) , Rayonier Inc. (RYN Quick QuoteRYN - Free Report) , UFP Industries (UFPI Quick QuoteUFPI - Free Report) , and Boise Cascade Company (BCC Quick QuoteBCC - Free Report) are set to benefit from increasing demand arising from strong housing/R&R activities.

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 distributing 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 and Repair & Remodeling Markets: The industry’s prospects are highly correlated with the U.S. housing market conditions. Although the housing market has slowed a bit this year, the same still remains hot, courtesy of higher demand on the back of historically low mortgage rates. Demand for housing and wood products has also been increasing, given work-from-home or stay-at-home orders amid the COVID-19 pandemic. 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: 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. As the broader economy continues to recover, the companies are expecting intermittent supply chain challenges to continue in the near term. 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 along with supply chain challenges are likely to persist.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products – Wood industry is a 11-stock group within the broader Construction sector. The Zacks Wood industry currently carries a Zacks Industry Rank #100, which places it in the top 40% 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.

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 30.4% compared with the S&P 500’s growth of 29.7% and the broader sector’s 21.9% rally.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings, which is a commonly used multiple for valuing wood stocks, the industry trades at 17.5X versus the S&P 500’s 20.9X and the sector’s 14X.

Over the last five years, the industry has traded as high as 43X, as low as 14.5X and at a median of 25.4X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

5 Wood Stocks to Keep a Watch

We have selected two stocks from the Zacks universe of wood stocks that currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). We have also highlighted three other stocks carrying a Zacks Rank #3 (Hold) with solid prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) 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.

Importantly, Boise Cascade — which has gained 31.2% in the past year — has seen a 20.4% upward estimate revision for 2021 earnings over the past 60 days. Earnings for 2021 are expected to grow 153.5%.

Price and Consensus: BCC

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.

This Zacks Rank #2 company’s consensus estimate for 2021 earnings has witnessed an upward revision of 24.3% in the past 60 days. The stock has gained 27.6% in the past year. Earnings for 2021 are expected to grow 104%.

Price and Consensus: RYN

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 SmartSide strand revenues, an 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 #3 company’s consensus estimate for 2021 earnings has witnessed an upward revision of 6.7% in the past 60 days. Earnings for the company — which has gained 106.6% in the past year — are expected to grow 215.3% for 2021.

Price and Consensus: LPX

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 its Retail segment. Expansion of the product portfolio through acquisitions and product innovations is also noteworthy.

The stock has gained 18.2% in the past year. Nonetheless, earnings for 2021 are expected to grow 83.3%.

Price and Consensus: UFPI

Trex Company: Based in Winchester, VA, this company manufactures and distributes wood and plastic composite products as well as related accessories mainly for residential decking, and railing applications. Sustained broad-based demand across all Trex Residential product lines and market share gains from wood have been driving growth of the company. Additionally, Trex’s tiered product strategy — which supports consumer decision making by providing a range of product aesthetics — is encouraging. Its focus on automation, modernization, energy efficiency and raw material processing is expected to be a major tailwind.

The stock has gained 32.3% in the past year. This Zacks Rank #3 company’s consensus estimate for 2021 earnings has been unchanged in the past 30 days. Earnings for 2021 are expected to grow 32.3%.

Price and Consensus: TREX