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Wood Industry's Near-Term Prospects Appear Gloomy

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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:

  • 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 bullish in recent times. Lower mortgage rates since the beginning of 2019 appear to be boosting buyer demand for housing and improving housing dynamics should help industry players’ entire mix of businesses, including lumber, Oriented Strand Board or OSB, and timber. The industry stands to benefit from increased government spending on infrastructure projects and strong gains in repair and remodeling activity.
     
  • 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 decline in costs will lead to lower profits as products sold will be indexed to the current lumber market.
     
  • Again, weaker export and domestic demand resulting from continued Chinese tariffs on Southern Yellow Pine logs coupled with an increase in tariffs on Southern Yellow Pine lumber remains the culprit. Meanwhile, lower OSB pricing continues to hurt the profitability of industry players. The companies whose products have a high degree of product concentration in OSB continue to struggle with lower OSB pricing. We do not expect OSB pricing to recover to levels seen in 2018 in the near term.


Zacks Industry Rank Indicates Bleak 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 #186, which places it in the bottom 26% 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 June 2019, the industry’s earnings estimate for 2020 has gone down 106%.

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

Industry Lags Sector, Outperforms S&P 500

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

Over this period, the industry has gained 40.4% compared with the sector’s growth of 41.9%. Meanwhile, the Zacks S&P 500 composite has witnessed growth of 30.7%.

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 51.6X versus the S&P 500’s 20.3X and the sector’s 18.4X.

Over the last five years, the industry has traded as high as 51.6X, as low as 16.3X and at the median of 23.9X, as the chart below shows.

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

 


Bottom Line

Low mortgage rates combined with resilient economic fundamentals comprising low unemployment rate should buoy the housing market and hence the wood industry. Also, uptick in single-family housing starts and strong gains in repair and remodeling activity are expected to drive demand. However, lower OSB pricing and continued Chinese tariffs on Southern Yellow Pine logs coupled with an increase in tariffs on Southern Yellow Pine lumber are pressing concerns for the industry.

Currently, there are two top-ranked stocks in the Zacks universe of Wood stocks that are standing tall despite weak industry fundamentals. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Trex Company, Inc. (TREX - Free Report) : Headquartered in Winchester, VA, this company, with a Zacks Rank #2, manufactures and distributes wood/plastic composite products, and related accessories primarily for the residential and commercial decking, and railing applications in the United States. Estimates for this company’s 2020 earnings per share have witnessed upward revisions of 0.7% in the past 60 days. The company has a three-five year expected EPS growth rate of 10%.

Price and Consensus: TREX

 


Norbord Inc. (OSB - Free Report) : Headquartered in Toronto, Canada, this company manufactures and sells wood-based panels for retail chains, contractor supply yards, and industrial manufacturers primarily in North America and Europe. Its estimates for 2020 earnings have witnessed upward revision of 2.2% in the past 30 days. The Zacks Consensus Estimate for the same indicates year-over-year growth of 1,087.7%.
 
Price and Consensus: OSB

 



Investors may also hold on to the following stocks, which currently carry a Zacks Rank #3 (Hold) and have solid earnings prospects.

Boise Cascade Company (BCC - Free Report) : Headquartered in Boise, ID, this company is one of the largest producers of engineered wood products and plywood in North America and a U.S. wholesale distributor of building products. The Zacks Consensus Estimate for 2020 earnings suggests year-over-year growth of 15.9%.

Price and Consensus: BCC

 



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 2020 earnings calls for year-over-year growth of 21.7%. Its three-five year expected EPS growth rate is pegged at 23.6%.

Price and Consensus: FND




JELD-WEN Holding, Inc. (JELD - Free Report) : Headquartered in Charlotte, NC, this company manufactures and sells doors and windows, primarily in North America, Europe, and Australasia. This Zacks Rank #3 company’s consensus estimate for 2020 earnings indicates year-over-year growth of 31.2%.

Price and Consensus: JELD



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