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3 Wood Stocks Worth Watching Despite a Challenging Industry

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The surge in interest rates has resulted in a substantial number of potential homebuyers being unable to afford properties in the U.S. housing market. This, in turn, has created challenging demand conditions for companies within the Zacks Building Products – Wood industry. Also, a difficult macroeconomic and geopolitical environment are added concerns. Nonetheless, the companies are expected to benefit from higher demand across repair and remodel (R&R) activity and more funding for infrastructure and carbon/ESG-related projects. Also, the companies’ inorganic and prudent cost containment should lend support to industry players like Trex Company, Inc. (TREX - Free Report) , 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 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

Tepid 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, 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 their demand and availability.

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 2024. 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 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.

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 #188, which places it in the bottom 25% 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 lower 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 September 2023, the industry’s earnings estimates for 2023 and 2024 decreased to $1.64 and $1.97 per share from $1.82 and $2.25 per share, respectively.

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 gained 7% compared with the S&P 500 and the broader sector’s 15.8% and 30.7% 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 22.9X versus the S&P 500’s 19.3X and the sector’s 14.7X.

Over the last five years, the industry has traded as high as 39.5X, as low as 12.2X and at a median of 22.2X, as the chart below shows.

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

3 Wood Stocks to Keep an Eye on

We have highlighted three stocks from the industry, which have been capitalizing on fundamental strengths.

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, a Zacks Rank #2 (Buy) company, gained 62.8% so far this year and surpassed earnings estimates in all the trailing four quarters, with the average surprise being 16.9%. It has seen a 3.4% and 2.3% upward estimate revision for 2023 and 2024 earnings over the past 30 days, depicting analysts’ optimism about the company’s prospects. It also carries an impressive VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: TREX

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, it remains well-positioned for 2024 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. The recent acquisition of BROSCO reinforces BMD's expansion efforts in the door and millwork sector, providing the company with instant market presence and increased scale in the Northeastern markets.

Importantly, BCC — a Zacks Rank #3 (Hold) company — gained 67.9% YTD. The company’s earnings surpassed earnings estimates in three of the trailing four quarters but missed on one occasion, leading to the average surprise of 20.3%. The stock has seen a 2.8% and 0.7% upward estimate revision for 2023 and 2024 earnings over the past 30 days. It carries an impressive VGM Score of A.

Price and Consensus: BCC

Masonite International: This Tampa, FL-based company manufactures and distributes interior as well as exterior doors. In the face of challenging market conditions, the company has prioritized effective price-cost management to bolster margins. Concurrently, substantial strides have been made in advancing its strategic initiatives under "Doors That Do More." Additionally, the recent acquisition of Fleetwood, a prominent manufacturer specializing in high-end glass doors for luxury residences, expands Masonite's product offerings to the premium segment of the market. This move enables the company to tap into new avenues of long-term growth at the upper echelons of the good, better, best spectrum.

DOOR, a Zacks Rank #3 company, gained 10.5% YTD. Although DOOR has seen a downward estimate revision for 2023 earnings, the same for 2024 increased 0.9% to $9.70 per share from $9.61 over the past 30 days. The positive estimate revisions depict analysts' optimism over the company’s prospects for 2024. The company’s earnings surpassed earnings estimates in two of the trailing four quarters but missed on two occasions, leading to the average surprise of 4.2%. It carries an impressive VGM Score of A.

Price and Consensus: DOOR

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