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5 Top Wood Industry Stocks to Buy on Solid Construction Activity

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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 wood industry outlook. In addition to this, higher lumber prices, and inorganic as well as prudent cost-containment moves are potent tailwinds. Louisiana-Pacific Corporation (LPX - Free Report) , Weyerhaeuser Company (WY - Free Report) , UFP Industries (UFPI - Free Report) , PotlatchDeltic Corporation (PCH - Free Report) and Boise Cascade Company (BCC - 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, and related accessories mainly for residential decking, and railing applications. 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 arising from the pandemic. Demand for housing and wood products has also been increasing, given 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 aiding in the gain of lumber prices. This is expected to benefit the wood industry players’ entire mix of businesses, including lumber, Oriented Strand Board (OSB) and timber. In addition to buoyant construction activity, higher consumer spending is expected to fuel growth. Consumers are driving a strengthening recovery from the pandemic recession spurred by distribution of billions of dollars in individual stimulus check, accelerated vaccines and a sharp decline in COVID cases.

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 “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 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 along with flexing harvest to capture seasonal and short-term opportunities.

Rapid Lumber Market Swings 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. 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 11-stock group within the broader Construction sector. The Zacks Wood industry currently carries a Zacks Industry Rank #6, which places it in the top 2% 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 outperforms 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 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 2021, the industry’s earnings estimates for 2021 and 2022 have been revised 31.4% and 22.7% 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 and Zacks S&P 500 composite over the past year.

Over this period, the industry has gained 75.4 % compared with the S&P 500’s growth of 36.8% and broader sector’s 55.8% 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 15.3X versus the S&P 500’s 21.8X and the sector’s 16.1X.

Over the last five years, the industry has traded as high as 43X, as low as 15.3X and at a median of 25.5X, as the chart below shows.

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

5 Wood Stocks to Bet On

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, 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 (Strong Buy) company’s consensus estimate for 2021 earnings has witnessed an upward revision of 52.7% in the past 30 days. The stock has gained 167.3% in the past year, better than the industry’s 75.4% rally. Earnings for 2021 are expected to grow 157.5%.


Price and Consensus: LPX


 

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 stock has gained 74.7% in the past year. The Zacks Consensus Estimate for 2021 earnings has witnessed an upward revision of 43.6% in the past 30 days, depicting optimism over the company’s prospects. Its 2021 earnings are expected to register growth of 160.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: WY


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 68.8% in the past year. The consensus estimate for this Zacks Rank #1 company’s 2021 earnings has witnessed an upward revision of 31% in the past 60 days. Earnings for 2021 are expected to grow 58.5%.

Price and Consensus: UFPI


 

PotlatchDeltic Corporation: This is an American diversified forest products company based in Spokane, WA. The company has been benefiting from solid performance of Timberlands and Wood Products segments. It also highlighted that strong housing fundamentals and strong 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 67% in the past year. This Zacks Rank #1 company’s consensus estimate for 2021 earnings has witnessed an upward revision of 41.3% in the past 30 days. Earnings for 2021 are expected to grow 156.1%.


Price and Consensus: PCH


 

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 89.6% in the past year — has seen 79.8% upward estimate revision for 2021 earnings over the past 30 days. Earnings for 2021 are expected to grow 118.3%.

Price and Consensus: BCC

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