Also, increased funding for infrastructure and carbon/ESG-related projects has been encouraging. Despite lingering concerns surrounding elevated mortgage rates and consumer’s cautious approach, efficient cost management, a steadfast commitment to product innovation, and strategic acquisitions are expected to offer support to industry players such as Trex Company, Inc. TREX, Louisiana-Pacific Corporation LPX and JELD-WEN Holding, Inc. JELD.
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
High Rates: The industry’s prospects are highly correlated with the U.S. housing and the R&R market (considered one of the largest in terms of lumber demand) conditions. The wood industry in the United States is expected to feel the pinch as consumer confidence remains low and interest rates remain at their highest level in over two decades. Although the Federal Reserve reduced the rate by half a percentage point (bringing it to a range of 4.75%-5%) on Sept. 18, 2024, mortgage rates remained elevated in the mid-6% range.
Economic uncertainty and ongoing weakness in home sales and building material sales are limiting residential remodeling. The residential remodeling sector is poised to gain from the resurgence of the housing market and the stabilization of material expenses as we progress into the upcoming year.
Rapid Lumber Market Swings: 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.
Higher Spending on Carbon/ESG Projects: The industry participants are experiencing higher funding for carbon/ESG-related projects to pursue carbon capture and storage work. 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 nine-stock group within the broader Construction sector. The Zacks Wood industry currently carries a Zacks Industry Rank #158, which places it in the bottom 37% 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 a 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 August 2024, the industry’s earnings estimates for 2024 have decreased to $2.18 from $2.24 per share.
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 37.2% compared with the broader sector’s 56.8% rise. The Zacks S&P 500 Composite has gained 39.4% over this period.
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 23.5X versus the S&P 500’s 22.1X and the sector’s 17.7X.
Over the last five years, the industry has traded as high as 26.7X, as low as 12.2X and at a median of 19.3X, 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.
Louisiana-Pacific: The company, often referred to as LP Building Solutions, operates out of Nashville, TN. It specializes in offering building solutions primarily tailored for new home construction, repair and remodeling projects, as well as outdoor structure markets. Looking ahead to 2024 and beyond, the company is poised for growth and market share increases in Siding and Structural Solutions. This is due to LP's recent investments in mill and prefinishing capacity, which enhance its competitive position. Additionally, improved operational efficiency and a positive outlook for single-family housing further bolster this optimistic outlook.
LPX — a Zacks Rank #3 (Hold) company — gained 99.5% over the past year. LPX earnings surpassed the consensus mark in all the trailing four quarters, with the average surprise being 25.2%. LPX earnings are expected to grow 56.5% in 2024. It carries an impressive VGM Score of B. This helps to identify stocks with the most attractive value, growth and momentum.
Price and Consensus: LPX
JELD-WEN Holding: Headquartered in Charlotte, NC, JELD-WEN designs, manufactures and sells doors and windows primarily in North America, Europe and Australasia. Despite the continuing uncertain macro environment across the company's portfolio of products and geographies in North America and Europe, JELD is expected to benefit from ongoing productivity improvements that mitigate the impact of potential volume declines. JELD-WEN has been focusing on margin expansion and increasing cash flow generation by reducing cost structure through operational efficiencies and rationalizing its global footprint. At the same time, JELD has streamlined workstreams for long-term profitable growth by optimizing the production network and investing in products and services to better serve customers.
JELD — a Zacks Rank #3 company — has gained 29.4% over the past year. JELD earnings surpassed the consensus mark in all the trailing four quarters, with the average surprise being 31.5%. This company carries an impressive VGM Score of A.
Price and Consensus: JELD
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. The company has been reaping the rewards of robust demand for its premium products and cost-reduction efforts. New product development has been pivotal, with recent innovations such as steel, mesh, and aluminum railing systems and heat-mitigating technology in new decking colors aligning well with consumer preferences. This product expansion supports Trex’s strategic goal of doubling its share of the railing market over five years. Additionally, Trex's line of branded fasteners enhances its offering, providing channel partners with a competitive, end-to-end solution that appeals to a wider consumer base across various price points. Its focus on automation, modernization, energy efficiency and raw material processing is expected to be a major tailwind.
TREX — a Zacks Rank #3 company — gained 20.3% over the past year. TREX earnings surpassed the consensus mark in all the trailing four quarters, with the average surprise being 9.2%. Earnings projections for 2024 have risen to $2.04 from $2.03 per share in the past 30 days. TREX earnings are expected to grow 9.7% in 2024.
Price and Consensus: TREX
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Louisiana-Pacific Corporation (LPX) : Free Stock Analysis Report
Trex Company, Inc. (TREX) : Free Stock Analysis Report
JELD-WEN Holding, Inc. (JELD) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
