The Zacks Building Products – Wood industry is expected to benefit from strong demand in response to accelerated repair and remodel (R&R) and "do-it-yourself" (DIY) activity. Furthermore, the U.S. housing market has started gaining strength of late, after the government eased restrictions imposed to contain the spread of COVID-19, thereby brightening the outlook for the wood industry. Apart from this, higher lumber prices, inorganic and prudent cost containment moves are potent tailwinds.
Masonite International Corporation (DOOR - Free Report) , Floor & Decor Holdings, Inc. (FND - Free Report) , Louisiana-Pacific Corporation (LPX - Free Report) , UFP Industries (UFPI - Free Report) and Weyerhaeuser Company (WY - Free Report) are set to benefit from increasing demand arising from strong housing/R&R activities.
The Zacks Building Products – Wood industry includes forest product companies as well as manufacturers of lumber and other wood products that are used in home construction, repair and remodeling, and 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 condition. Markets have been showing resilience of late and housing is witnessing an impressive comeback on major data points, given low mortgage rates. With the reopening of the economy, demand for housing and wood products has been improving amid broad economic disruption since late May 2020. The remarkable recovery in single-family housing construction and repair/remodel activity has led to surging lumber prices in August, hitting new all-time highs. This is expected to benefit the wood industry players’ entire mix of businesses, including lumber, Oriented Strand Board (OSB) and timber.
Improving Repair & Remodeling Market: The industry stands to benefit from accelerated repair and remodeling activity. Also, increased government spending on infrastructure projects bodes well. 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. Under “working-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 have been granted for the 25% tariff.
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 Weigh on Margins: Historically, volatility in lumber price 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, 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 13-stock group within the broader Construction sector. The Zacks Wood industry currently carries a Zacks Industry Rank #3, which places it in the top 1% 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.
The industry’s position 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 July 2020, the industry’s earnings estimates for 2020 and 2021 have been revised 76.6% and 22.8% upward, respectively.
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 as well as the Zacks S&P 500 composite over the past year.
Over this period, the industry has risen 17.1% compared with the S&P 500’s growth of 11.7% and the broader sector’s 10.8% rally.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing wood stocks, the industry trades at 26.5X versus the S&P 500’s 22.2X 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 the median of 23.7X, 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
Masonite International Corporation: This Tampa, FL-based company manufactures, and distributes interior and exterior doors. The Zacks Rank #1 (Strong 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 the COVID-19 cost savings that it implemented late in the first quarter will act as added positives. Importantly, Masonite has seen upward estimate revisions for its 2020 bottom line over the past 30 days by 46.8%. The stock has gained 63.8% in the past year, performing better than the industry’s 17.1% rally. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: DOOR
Floor & Decor Holdings, Inc.: Headquartered in Atlanta, GA, this company operates as a multi-channel specialty retailer of hard surface flooring and related accessories. A strong home improvement industry backdrop along with solid housing fundamental is expected to drive Floor & Décor’s growth. Notably, the company has been benefiting from the strongest DIY customer trends over the years. This Zacks Rank #1 company’s consensus estimate for 2020 earnings has been revised upward by 43.8% over the past 60 days. The stock has gained 47.6% in the past year.
Price and Consensus: FND
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 #1 company’s consensus estimate for 2020 earnings has witnessed upward revision of 7.2% in the past 30 days. The stock has gained 33.6% in the past year.
Price and Consensus: LPX
UFP Industries: Headquartered in Grand Rapids, MI, UFP Industries supplies wood, wood composite and other products in the retail, industrial, and construction markets. The increase in home improvement activity resulting from stay-at-home orders has been benefitting its Retail segment. Moreover, expansion of its product portfolio through acquisitions and product innovations is noteworthy. This Zacks Rank #2 (Buy) company’s consensus estimate for 2020 earnings has witnessed upward revision of 21.3% in the past 60 days. The stock has gained 45.1% in the past year.
Price and Consensus: UFPI
Weyerhaeuser Company: Based in Seattle, WA, this company is one of the world's largest private owners of timberlands. The company’s focus on operational excellence is expected to drive growth. Again, U.S. housing and R&R market recovery is raising hopes. Although this Zacks Rank #2 stock has gained 5% in the past year, the consensus estimate for 2020 earnings has witnessed upward revision of 52.2% in the past 30 days, depicting optimism over the company’s prospects.
Price and Consensus: WY