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Wood Industry Outlook Hit by Low Lumber Prices, Soft Housing

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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 wood industry. An unusual rise in the 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 sold will be 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 owing to the weakness in home construction.
  • The industry’s prospects are highly correlated with the 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 therefore 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. Also, the industry stands to benefit from increased government spending on infrastructure projects and strong gains in repair and remodeling activity. Meanwhile, although a sharp decline in the construction of multi-family housing units remains the culprit, single-family housing starts have been marching higher and is the primary growth driver of wood products’ demand.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Building Products – Wood industry is a 12-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 #152, which places it in the bottom 41% 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 January 2019, the industry’s earnings estimate for 2019 has gone down by 35.5%.

Despite the industry’s dull 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 20.5% compared with the sector’s decline of 5.2%. Meanwhile, the Zacks S&P 500 composite has witnessed growth of 0.2%.

One-Year Price Performance

Industry’s Current Valuation

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 25X versus the S&P 500’s 16.7X and the sector’s 14.2X.

Over the last five years, the industry has traded as high as 27.5X, as low as 16.3X and at the median of 23.6X, as the chart below shows.

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

Bottom Line

Low mortgage rates combined with solid economic fundamentals such as a low unemployment rate and strong consumer spending should buoy the housing market and hence for the wood industry. Also, uptick in single-family housing starts and strong gains in repair and remodeling activity are expected to drive demand. However, slower residential construction market in the United States, continued lumber price deflation, and higher logging and hauling costs are pressing concerns for the industry.

Currently, two stocks in the Zacks Wood space currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boise Cascade Company (BCC - Free Report) : Headquartered in Boise, ID, this company, with a Zacks Rank #1, is one of the largest producers of engineered wood products and plywood in North America and a U.S. wholesale distributor of building products. Its EPS estimates for the current year have witnessed upward revision of 10.5% in the past 30 days.

Price and Consensus: BCC

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 #2 company’s consensus estimate for 2019 earnings indicates year-over-year growth of 19.2%. Estimates for 2019 have witnessed upward revision of 2.5% in the past 30 days.

Price and Consensus: UFPI

Investors might also prefer holding on to the following three stocks that have impressive growth prospects.

BlueLinx Holdings Inc. (BXC - Free Report) : Based in Marietta, GA, this Zacks Rank #3 (Hold) stock distributes building and industrial products in the United States. The Zacks Consensus Estimate for earnings for the current year indicates year-over-year growth of 116.3%.

Price and Consensus: BXC

Floor & Decor Holdings, Inc. (FND - Free Report) : Headquartered in Smyrna, GA, this company operates as a multi-channel specialty retailer of hard surface flooring and related accessories. This Zacks Rank #3 company’s consensus estimate for 2019 earnings indicates year-over-year growth of 14.4%. Estimates for 2019 have witnessed upward revision of 1% in the past 30 days.

Price and Consensus: FND

Armstrong Flooring, Inc. : Lancaster, PA-based company is engaged in the design and manufacture of flooring solutions primarily in North America. This Zacks Rank #3 company’s consensus estimate for 2020 earnings indicates year-over-year growth of 168.2%.

Price and Consensus: AFI

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