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Top 3 Stocks to Buy on Prospering Wood Industry Trends

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The companies under the Zacks Building Products – Wood industry are expected to benefit from higher demand across repair and remodel (R&R) activity and more funding for infrastructure and carbon/ESG-related projects. Although soft demand from the residential market and a difficult macroeconomic and geopolitical environment has been hurting, the companies’ inorganic and prudent cost containment should support industry players like Weyerhaeuser Company (WY - Free Report) , Trex Company, Inc. (TREX - Free Report) , and Boise Cascade Company (BCC - Free Report) .

Industry Description

The Zacks Building Products – Wood industry includes forest product companies and manufacturers of lumber as well as other wood products 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

Spending on Carbon/ESG Projects, Repair & Remodeling: The industry participants 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 pandemic-related challenges are creating hurdles, the R&R market (considered one of the largest in terms of lumber demand) has been impressive. The age of U.S. housing stock and a higher level of homeowner equity provide a favorable backdrop for repair-and-remodel spending for 2023. 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, 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 boosting harvest to capture seasonal and short-term opportunities.

Lower Demand: The slowdown in the U.S. housing market has been impacting demand. Presently, the outlook for the housing industry remains less favorable compared to the last couple of years due to several headwinds, such as a rapid increase in mortgage rates, housing affordability challenges, high inflation and growing concerns about the economy. Although the residential market has started to gain momentum owing to the lack of existing homes for sale, macroeconomic uncertainties might dampen demand in the future.

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. Due to the very nature of their properties, timberland REITs are required to follow eco-friendly mandates in their trade. The companies have been experiencing supply-chain challenges and higher freight and transport costs. For example, 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 their demand and availability.

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 #39, which places it in the top 15% 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 outperform 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 the higher 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 June 2023, the industry’s earnings estimates for 2023 and 2024 increased to $1.85 and $2.24 per share from $1.60 and $2.04 per share, 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 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 1.7% against the S&P 500 and the broader sector’s 8.7% and 28.2% rise, 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 20.9X versus the S&P 500’s 19.2X and the sector’s 14.6X.

Over the last five years, the industry has traded as high as 39.5X, as low as 12.2X and at a median of 22.04X, as the chart below shows.

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

3 Wood Stocks to Buy Now

We have highlighted three stocks sporting a Zacks Rank #1 (Strong Buy), which have been capitalizing on fundamental strengths. You can see the complete list of today’s Zacks #1 Rank stocks here.

Weyerhaeuser: 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, more home improvement and R&R market activities are raising hopes. Focus on operational excellence and efforts to boost financial flexibility enabled it to generate solid cash flow and strengthen the balance sheet. Weyerhaeuser remains optimistic about its performance despite persistent supply-chain issues, the recent uptick in mortgage rates and ongoing affordability concerns in the housing market, given favorable demographics and a decade of underbuilding and historically low inventory for new and existing homes.

Weyerhaeuser has gained 3.5% year to date (YTD). Yet, WY has seen an 11.2% upward estimate revision for 2023 earnings over the past 30 days. The positive estimate revisions depict analysts' optimism over the company’s prospects. WY’s earnings surpassed earnings estimates in all the trailing four quarters, with the average surprise being 40.8%.

Price and Consensus: WY

Boise Cascade Company: Based in Boise, ID, this company makes wood products and distributes building materials in the United States as well as Canada. Although BCC acknowledges that the industry will face challenges during 2023, given the current economic uncertainties and weaker demand from residential construction, it remains well-positioned to execute the growth initiatives that started in 2022. The company has been demonstrating a balanced approach to capital allocation, including the ability to pursue additional growth initiatives that align with strategy. Boise Cascade has also been increasing commodity offerings that will instill growth in the existing and underserved markets and across its entire national footprint.

Importantly, BCC stock has gained 50.2% YTD, which surpassed earnings estimates in three of the trailing four quarters but missed on one occasion, leading to the average surprise of 25.2%. It carries an impressive VGM Score of A. The stock has seen a 31.6% upward estimate revision for 2023 earnings over the past 60 days.

Price and Consensus: BCC

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. Despite soft demand owing to softening economic conditions and more resilient repair and remodeling, the sector has been driving growth. Additionally, Trex’s tiered product strategy — which supports consumers’ 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.

TREX gained 59% so far this year and surpassed earnings estimates in three of the trailing four quarters but missed on one occasion, with the average surprise being 11.1%. It has seen a 9.3% upward estimate revision for 2023 earnings over the past 60 days.

Price and Consensus: TREX

See More Zacks Research for These Tickers

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