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Volatility Woes Dampen Wood Industry's Near-Term Prospects

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The Zacks Building Products – Wood industry includes manufacturers of lumber and other wood products that are used in home construction, repair and remodeling, and development of outdoor structures. Companies in the industry also design, manufacture, source and sell flooring products.

Let’s take a look at the industry’s three major themes:

  • Volatility in lumber price has been a major concern for the industry. An unusual rise in cost of lumber products sold by primary producers will increase the cost of inventory and limit margins on fixed-priced lumber products. However, a decrease in costs will lead to lower profits as products will be sold indexed to the current lumber market. Lumber prices have declined sharply in recent months after rising steadily for years. A major factor that has contributed to the increase in lumber prices in the past year is the imposition of U.S. import duties on Canadian lumber. However, the recent decline in lumber prices can be primarily attributed to a sharp increase in supply.
  • The industry’s prospects are highly correlated with U.S. housing market condition. Any untoward situation influencing the construction and housing sectors will impact the industry participants’ financials. Housing starts, a big source of demand for forestry products, have been less bullish in recent times. Although lower mortgage rates since the beginning of 2019 appear to be boosting buyer demand for housing, builders are contending with rising costs for labor and land, limiting new construction activity. Additionally, higher labor and transportation costs are hurting the wood industry.
  • Nonetheless, the operating backdrop is improving for the U.S. homebuilding space and hence for the wood industry, courtesy of declining mortgage rates and moderating home prices. Mortgage rates have been on a decline thanks to a dovish Fed that it is not in a hurry to raise rates this year after four rates hikes in 2018. Again, the outlook for home construction should improve in the key spring selling season. The industry also stands to benefit from increased government spending on infrastructure projects and strong gains in repair and remodeling activity.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Building Products – Wood industry is a 16-stock group within the broader Construction Sector.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. The Zacks Wood industry currently carries a Zacks Industry Rank #173, which places it in the bottom 32% of more than 250 Zacks industries. 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 position in the bottom 50% of the Zacks-ranked industries is a result of negative 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 2018, the industry’s earnings estimate for 2019 has gone down by 23.2%.

Despite the industry’s drab near-term prospects, we will present a few wood stocks that one can hold on to. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags Sector and S&P 500

The Zacks Building Products – Wood industry has lagged its own sector over the past year. Also, it has underperformed the Zacks S&P 500 composite over the same time frame.

Over this period, the industry has fallen 20.6% compared with the sector’s decline of 10%. Meanwhile, the Zacks S&P 500 composite has witnessed growth of 6.8%.

One-Year Price Performance

Wood Industry Looks Expensive

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 24.1X versus the S&P 500’s 17.2X and the sector’s 14.1X.

Over the last five years, the industry has traded as high as 27.5X, as low as 16.3X and at the median of 23.4X, as the chart below shows.

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


Bottom Line

Solid economic recovery and a strong labor market along with increased government spending bode well for the industry. Also, the spring selling season, and strong gains in repair and remodeling activity are expected to drive demand. However, volatility in lumber prices and higher logging and hauling costs are pressing concerns for the industry.

Below we are presenting one stock, which sports a Zacks Rank #1 (Strong Buy), and another with a Zacks Rank #2 (Buy). Investors might also prefer holding on to three stocks that have impressive growth prospects. You can see the complete list of today’s Zacks #1 Rank stocks here.

PotlatchDeltic Corporation (PCH - Free Report) : This leading real estate investment trust (REIT) currently sports a Zacks Rank #1. Its EPS estimates for the current year have witnessed upward revision of 2.1% in the past 60 days.

Price and Consensus: PCH

Trex Company, Inc. (TREX - Free Report) : This Winchester, VA based company is a manufacturer of wood-alternative decking and railing. This stock carries a Zacks Rank #2 and the Zacks Consensus Estimate for earnings for the current year indicates year-over-year growth of 8.1%.

Price and Consensus: TREX

Floor & Decor Holdings, Inc. (FND - Free Report) : This, Smyrna, GA based multi-channel specialty retailer of hard surface flooring as well as related accessories has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2019 EPS indicates year-over-year growth of 13.4%.

Price and Consensus: FND

Universal Forest Products, Inc. (UFPI - Free Report) : Headquartered in Grand Rapids, MI, this company designs, manufactures and markets wood and wood-alternative products in North America, Europe, Asia and Australia. This Zacks Rank #3 company’s consensus estimate for 2019 earnings indicates year-over-year growth of 14.2%.

Price and Consensus: UFPI

JELD-WEN Holding, Inc. (JELD - Free Report) : This Charlotte, NC-based company manufactures and sells doors and windows primarily in North America, Europe and Australasia. The stock carries a Zacks Rank #3 and the consensus estimate for 2019 earnings indicates year-over-year growth of 10%.

Price and Consensus: JELD


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