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4 Stocks Worth Watching From the Promising Wood Industry
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The Zacks Building Products – Wood industry is expected to benefit from higher demand across export markets, repair and remodel (R&R) activity and more funding for carbon/ESG-related projects despite continuous supply-chain woes, lower lumber prices, inflationary pressure and lower homes sales. In addition, inorganic and prudent cost-containment moves should lend support to industry players like Floor & Decor Holdings, Inc. (FND - Free Report) , UFP Industries, Inc. (UFPI - Free Report) and Boise Cascade Company (BCC - Free Report) and Masonite International Corporation (DOOR - Free Report) .
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 into 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 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 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. In a bid to reduce costs, companies have been reducing the cost structure of their facilities through 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, 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 a 12-stock group within the broader Construction sector. The Zacks Wood industry currently carries a Zacks Industry Rank #27, which places it in the top 11% 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 Lags Sector & S&P 500
The Zacks Building Products – Wood industry has underperformed the broader Zacks Construction sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has lost 26.2% compared with the S&P 500 and the broader sector’s 17.6% and 19.7% 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 13.7X versus the S&P 500’s 15.7X and the sector’s 10.5X.
Over the last five years, the industry has traded as high as 39.5X, as low as 12.2X and at a median of 21.8X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
4 Wood Stocks to Keep a Close Eye On
We have selected two stocks from the Zacks universe of wood stocks that currently carry a Zacks Rank #1 (Strong Buy). We have also highlighted two stocks currently carrying a Zacks Rank #3 (Hold) and have been capitalizing on fundamental strengths. You can see the complete list of today’s Zacks #1 Rank 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. 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 9.2% in the past year — has seen a 2.1% upward estimate revision for 2022 earnings over the past 30 days. BCC has an expected earnings growth rate of 14% for 2022.
Price and Consensus: BCC
UFP Industries: Headquartered in Grand Rapids, MI, UFP Industries supplies wood, wood composite and other products to retail, industrial, and construction markets. The company has been gaining from its diversity of markets, higher organic unit sales, solid contributions from buyouts, new product innovation and an improved pricing model. UFP Industries' industrial and construction segments are experiencing favorable growth trends and profitability, given normalized retail demand.
This Zacks Rank #1 stock has gained 0.2% in the past year. That said, UFPI has seen an upward estimate revision of 0.2% and 0.4% for 2022 and 2023 earnings, respectively, over the past 30 days. This depicts analysts’ optimism over the company’s prospects. UFP Industries’ 2022 earnings are expected to grow 23.2%.
Price and Consensus: UFPI
Floor & Decor Holdings: Based in Atlanta, GA, this Zacks Rank #3 company operates as a multi-channel specialty retailer and commercial flooring distributor of hard surface flooring and related accessories. The company has been benefiting from its growth strategies, which are successfully generating profits despite near-term macroeconomic challenges like inflationary costs, rising mortgage rates, and declining existing home sales.
FND shares have lost 40.6% over the past year. That said, FND has an expected earnings growth rate of 11.1% for 2022 and 28.4% for 2023.
Price and Consensus: FND
Masonite International: This Tampa, FL-based company manufactures, and distributes interior as well as exterior doors. This Zacks Rank #3 company is expected to generate higher EBITDA owing to the pricing strategy adopted in the North American Residential segment. Product introduction and marketing initiatives aimed at supporting growth and a favorable mix have been benefiting the company. These initiatives, combined with prudent price-cost management, will allow DOOR to navigate near-term macroeconomic headwinds well and make continued progress toward 2025 Centennial Plan.
DOOR has dropped 32.8% over the past year. Yet, DOOR has seen a 10.3% upward estimate revision for 2022 earnings over the past 60 days. The positive estimate revisions depict analysts' optimism over the company’s prospects. DOOR has an expected earnings growth rate of 26.7% for 2022 and 9% for 2023.
Price and Consensus: DOOR
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4 Stocks Worth Watching From the Promising Wood Industry
The Zacks Building Products – Wood industry is expected to benefit from higher demand across export markets, repair and remodel (R&R) activity and more funding for carbon/ESG-related projects despite continuous supply-chain woes, lower lumber prices, inflationary pressure and lower homes sales. In addition, inorganic and prudent cost-containment moves should lend support to industry players like Floor & Decor Holdings, Inc. (FND - Free Report) , UFP Industries, Inc. (UFPI - Free Report) and Boise Cascade Company (BCC - Free Report) and Masonite International Corporation (DOOR - Free Report) .
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 into 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 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 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. In a bid to reduce costs, companies have been reducing the cost structure of their facilities through 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, 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 a 12-stock group within the broader Construction sector. The Zacks Wood industry currently carries a Zacks Industry Rank #27, which places it in the top 11% 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 Lags Sector & S&P 500
The Zacks Building Products – Wood industry has underperformed the broader Zacks Construction sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has lost 26.2% compared with the S&P 500 and the broader sector’s 17.6% and 19.7% 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 13.7X versus the S&P 500’s 15.7X and the sector’s 10.5X.
Over the last five years, the industry has traded as high as 39.5X, as low as 12.2X and at a median of 21.8X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
4 Wood Stocks to Keep a Close Eye On
We have selected two stocks from the Zacks universe of wood stocks that currently carry a Zacks Rank #1 (Strong Buy). We have also highlighted two stocks currently carrying a Zacks Rank #3 (Hold) and have been capitalizing on fundamental strengths. You can see the complete list of today’s Zacks #1 Rank 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. 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 9.2% in the past year — has seen a 2.1% upward estimate revision for 2022 earnings over the past 30 days. BCC has an expected earnings growth rate of 14% for 2022.
Price and Consensus: BCC
UFP Industries: Headquartered in Grand Rapids, MI, UFP Industries supplies wood, wood composite and other products to retail, industrial, and construction markets. The company has been gaining from its diversity of markets, higher organic unit sales, solid contributions from buyouts, new product innovation and an improved pricing model. UFP Industries' industrial and construction segments are experiencing favorable growth trends and profitability, given normalized retail demand.
This Zacks Rank #1 stock has gained 0.2% in the past year. That said, UFPI has seen an upward estimate revision of 0.2% and 0.4% for 2022 and 2023 earnings, respectively, over the past 30 days. This depicts analysts’ optimism over the company’s prospects. UFP Industries’ 2022 earnings are expected to grow 23.2%.
Price and Consensus: UFPI
Floor & Decor Holdings: Based in Atlanta, GA, this Zacks Rank #3 company operates as a multi-channel specialty retailer and commercial flooring distributor of hard surface flooring and related accessories. The company has been benefiting from its growth strategies, which are successfully generating profits despite near-term macroeconomic challenges like inflationary costs, rising mortgage rates, and declining existing home sales.
FND shares have lost 40.6% over the past year. That said, FND has an expected earnings growth rate of 11.1% for 2022 and 28.4% for 2023.
Price and Consensus: FND
Masonite International: This Tampa, FL-based company manufactures, and distributes interior as well as exterior doors. This Zacks Rank #3 company is expected to generate higher EBITDA owing to the pricing strategy adopted in the North American Residential segment. Product introduction and marketing initiatives aimed at supporting growth and a favorable mix have been benefiting the company. These initiatives, combined with prudent price-cost management, will allow DOOR to navigate near-term macroeconomic headwinds well and make continued progress toward 2025 Centennial Plan.
DOOR has dropped 32.8% over the past year. Yet, DOOR has seen a 10.3% upward estimate revision for 2022 earnings over the past 60 days. The positive estimate revisions depict analysts' optimism over the company’s prospects. DOOR has an expected earnings growth rate of 26.7% for 2022 and 9% for 2023.
Price and Consensus: DOOR