The Zacks Construction products – Wood The industry is expected to benefit from increased demand in export markets, repair and refurbishment (R&R) activities and increased funding for carbon/ESG related projects despite continued supply chain challenges. supply, falling lumber prices, inflationary pressure and falling home sales. In addition, inorganic and prudent cost containment measures are expected to provide support to industry players such as Floor & Decor Holdings, Inc. (FND – free report), UFP Industries, Inc. (UFPI – free report) and Boise Cascade Company (Bcc – free report) and Masonite International Society (GATE – free report).
Description of the industry
The Zacks Building Products – Wood industry includes forest products companies and manufacturers of lumber and other wood products used in the construction, repair and renovation of homes and in the development of exterior structures. Companies in the sector design, manufacture, source and sell flooring products such as tile, wood, laminate, vinyl and natural stone flooring, as well as decorative and decorative accessories. facility. The industry players are also involved in the manufacturing and distribution of wood and plastic composite products and related accessories primarily for residential decking and railing applications. The industry also includes Timberland’s real estate investment trusts or REITs.
3 Trends Shaping the Future of Building Products – Lumber Industry
Increased demand in export markets, increased spending on carbon/ESG projects and repair and retrofit markets: Industry participants have experienced higher demand in export markets due to a combination of various factors. For example, shipping and logistics issues are increasing the demand for North American logs in Japan. Again, trade restrictions have impacted the import of Australian logs into China. Meanwhile, the Russian-Ukrainian war led to a ban on log exports from Russia. Overall, this tightening of the global wood market is proving favorable for some of the players in the industry. Meanwhile, companies are getting higher funding for carbon/ESG projects to continue carbon capture and storage work. The outlook for the industry is highly correlated to conditions in the US housing market. Although the housing market slowdown and pandemic-related challenges are creating headwinds, the R&R market (considered one of the largest in terms of lumber demand) is doing well. Currently, falling wood prices are creating an opportunity to do renovations or do-it-yourself projects, helping those in the wood industry. Moreover, increased government spending on infrastructure projects bodes well.
Acquisitions, product innovation and effective cost reduction strategies: Companies are also betting on acquisitions and divestitures to grow and improve the quality of their portfolio. New products continue to be a major revenue driver for industry players. Additionally, efforts to introduce products have likely helped players. In an effort to reduce costs, companies have reduced the cost structure of their facilities by selling or closing underperforming manufacturing units and facilities as well as investing in technology. Additionally, industry players have focused on operational excellence, including merchandising for value, harvesting and transportation efficiency, and harvesting flexibility to capture seasonal and short-term opportunities. .
Rapid fluctuations in the timber market and supply chain challenges weigh on margins: Historically, lumber price volatility has been a major concern for the lumber industry. Any unusual increase in the cost of lumber products sold by primary producers increases the cost of inventory and limits margins on fixed price lumber products. Yet lower costs are eating away at profits, as products sold are pegged to the current lumber market. Meanwhile, the forestry sector is governed by federal rules and state forestry commissions, which are subject to frequent change, thus affecting businesses. Additionally, due to the very nature of their properties, Timberland REITs are required to follow environmentally responsible mandates in their business. In addition, companies faced supply chain issues and higher freight and transportation costs. For example, the unavailability of resin poses quite a challenge. Industry players use a significant amount of various resins in manufacturing processes. Resin product costs are influenced by changes in the prices or availability of the raw materials used to produce the resins, primarily petroleum products, as well as the demand for and availability of resin products.
Zacks’ Industry Rankings Indicate Bright Prospects
The Zacks Building Products – Wood industry is a group of 12 stocks within the broader Construction sector. The Zacks lumber industry currently carries a Zacks industry ranking of #27, which places it in the top 11% of over 250 Zacks industries.
That of the group Zacks Industry Ranking, which is essentially the average of the Zacks ranking of all member stocks, indicates an impressive near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
Before outlining a few stocks you might consider for your portfolio, let’s take a look at recent stock market performance and the industry valuation picture.
The industry is lagging the sector and the 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.
During this period, the industry lost 26.2% against the S&P 500 and the broader sector declines of 17.6% and 19.7%, respectively.
Year-over-year price performance
Current industry assessment
Based on the 12-month price-to-earnings ratio, which is a multiple commonly used to value lumber stocks, the industry is trading at 13.7X versus 15.7X for the S&P 500 and 10.5X for the sector.
Over the past five years, the industry has traded as low as 39.5X, as low as 12.2X and at a median of 21.8X, as seen in the chart below.
Industry P/E ratio (forward 12-Month) versus S&P 500
4 wood stocks to watch closely
We have selected two stocks from the Zacks Universe of Wood Stocks that currently carry a Zacks Rank #1 (Strong Buy). We also highlighted two stocks currently carrying a Zacks rank #3 (Hold) and capitalizing on fundamental strengths.
Boise Cascade Company: Based in Boise, ID, this Zacks Rank #1 company manufactures wood products and distributes building materials in the United States as well as Canada. Boise Cascade’s Building Materials Distribution and Wood Products segments are gaining strength on strong demand for finished goods (particularly for EWPs) as well as rising commodity prices. It has also increased core product offerings that will drive growth in existing markets, underserved markets and across its national footprint.
Importantly, Boise Cascade — which has gained 9.2% over the past year — has seen a 2.1% upward revision to 2022 earnings estimates over the past 30 days. BCC forecasts a profit growth rate of 14% for 2022.
Pricing and Consensus: BCC
UFP Industries: Based in Grand Rapids, Michigan, UFP Industries supplies lumber, composite wood and other products to the retail, industrial and construction markets. The company benefited from its diverse markets, growing organic unit sales, strong contributions from buyouts, new product innovation and an improved pricing model. UFP Industries’ industrial and construction segments are experiencing favorable growth and profitability trends given the normalization of retail demand.
This Zacks Rank No. 1 stock has gained 0.2% over the past year. That said, the UFPI has seen an upward revision to estimates of 0.2% and 0.4% for 2022 and 2023 earnings, respectively, over the past 30 days. This depicts analysts’ optimism about the company’s prospects. UFP Industries’ 2022 results are expected to grow by 23.2%.
Awards and Consensus: UFPI
Floors and decorations: Based in Atlanta, Georgia, this Zacks Tier 3 company operates as a multi-channel specialty retailer and distributor of commercial flooring of hard surface flooring and related accessories. The company has benefited from its growth strategies, which are successfully generating profits despite near-term macro challenges such as inflationary costs, rising mortgage rates and falling existing home sales.
FND shares have lost 40.6% over the past year. That said, FND has an expected earnings growth rate of 11.1% for 2022 and 28.4% for 2023.
Pricing and Consensus: FND
Masonite International: This Tampa, Florida-based company manufactures and distributes interior and exterior doors. This Zacks #3 ranked company is expected to generate higher EBITDA due to the pricing strategy adopted in the North American residential segment. Product introduction and marketing initiatives to support growth and a favorable mix have benefited the company. These initiatives, combined with prudent pricing and cost management, will enable DOOR to successfully manage near-term macroeconomic headwinds and continue to progress towards the 2025 Centennial Plan.
DOOR has fallen 32.8% over the past year. Still, DOOR has seen a 10.3% upward revision to 2022 revenue estimates over the past 60 days. Positive revisions to estimates reflect analysts’ optimism about the company’s outlook. DOOR has an expected earnings growth rate of 26.7% for 2022 and 9% for 2023.
Pricing and Consensus: GATE