Continuous supply-chain woes, inflationary pressure mainly for material and labor, high fuel-related costs and lower homes sales have been impacting the Zacks Building Products – Wood industry. However, the industry players are expected to benefit from higher demand across export markets, repair and remodel (R&R) activity and more funding for infrastructure and carbon/ESG-related projects despite macro-economic headwinds. In addition, inorganic and prudent cost-containment moves should lend support to industry players like Enviva Inc. (EVA Quick QuoteEVA - Free Report) , Boise Cascade Company (BCC Quick QuoteBCC - Free Report) and Masonite International Corporation (DOOR Quick QuoteDOOR - 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.

4 Trends Shaping the Future of Building Products - Wood Industry

Lower Demand: The recent slowdown in the U.S. housing market and continued headwinds in China have been impacting the demand for industry players’ products. Industry players’ businesses are directly influenced by the U.S. housing market. Any untoward situation will have an unfavorable impact on the company’s operations. Presently, the outlook for housing industry remains less favorable compared to the last couple of years due to several ongoing headwinds, such as a rapid increase in mortgage rates, housing affordability challenges, high inflation and growing concerns about the economy.

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 prices or availability of raw materials used to produce resins, primarily petroleum products, and the demand and availability of resin products.

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 impressively. 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. Again, in a bid to reduce costs, companies have been reducing the cost structure of their 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, and flexing harvest to capture seasonal and short-term opportunities.

Zacks Industry Rank Indicates Dull 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 #168, which places it in the bottom 33% 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 bleak 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.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the bleak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since October 2022, the industry’s earnings estimates for 2023 have decreased to $2.11 per share from $2.38.

Despite the industry’s blurred near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

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 34.3% compared with the S&P 500 and the broader sector’s 21.2% and 22.5% 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 19.02X versus the S&P 500’s 17.2X and the sector’s 12.3X.

Over the last five years, the industry has traded as high as 39.5X, as low as 12.2X and at a median of 21.5X, as the chart below shows.

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

3 Wood Stocks to Keep a Close Eye On

We have selected one stock from the Zacks universe of wood stocks that currently carries 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 declined 0.1% in the past year — has seen a 5% upward estimate revision for 2023 earnings over the past 30 days.

Price and Consensus: BCC

Masonite International: This Tampa, FL-based company manufactures, and distributes interior as well as exterior doors. The 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 the 2025 Centennial Plan.

This Zacks Rank #3 company has lost 29.2% over the past year. Yet, DOOR has seen an upward estimate revision for 2023 earnings to $9.71 per share from $9.62 over the past 30 days. The positive estimate revisions depict analysts' optimism over the company’s prospects.

Price and Consensus: DOOR

Enviva: Headquartered in Bethesda, MA, Enviva makes and sells utility-grade wood pellets. The company has been gaining from a very constructive pricing environment for wood pellets both for the near term and for long-term contracted deliveries. This is helping EVA to boost margins, with the continued expectation of further improvements in the near term. Productivity improvements across its manufacturing facilities, improving supply chain conditions and the constructive pricing environment, particularly in Europe, bode well for future growth.

This Zacks Rank #3 stock has lost 34.4% in the past year. That said, EVA’s 2023 earnings are expected to grow 317.7% from the 2022 level.

Price and Consensus: EVA