3 Wood Stocks Worth Watching in a Thriving Industry

Although spending on home repair and remodel (R&R) activities has decreased from the peaks seen during the pandemic, given high rates and dwindling consumer confidence, there remains a persistent need for investment in critical replacements, addressing home performance deficiencies, and modernization efforts in the nation's aging homes. Fortunately, the pace of market decline is projected to slow down in the latter half of 2024. Residential remodeling is anticipated to capitalize on the recovering housing market and the stabilization of material costs as we transition into 2025, benefiting the Zacks Building Products – Wood industry.

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, UFP Industries, Inc. UFPI and Louisiana-Pacific Corporation LPX.

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

Low-Existing Homes & Higher Spending on Carbon/ESG Projects: The industry’s prospects are highly correlated with the U.S. housing market conditions. The lack of existing homes for sale and positive employment conditions have been bolstering the prospects for the U.S. housing market. The age of U.S. housing stock and a higher level of homeowner equity provide a favorable backdrop for repair-and-remodel spending for 2024. Additionally, 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.

High Rates & Dwindling Consumer Confidence: 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 hits a new low and interest rates remain at their highest level in over two decades. With the Federal Reserve holding rates steady between 5.25% and 5.5% since August 2023, the sector faces significant challenges. Despite initial hopes for rate cuts, the Fed's recent decision to maintain current rates due to concerns about inflation has put further strain on consumers.

Consumer confidence, a key indicator of economic health, has also taken a hit. In April, the Conference Board reported that its consumer confidence index fell to 97.0, the lowest level since July 2022. Worries about the labor market and income weighed heavily on consumers, leading to a more pessimistic outlook on short-term business conditions. This sentiment is further reflected in consumers' expectations for the future. According to the report, the percentage of consumers anticipating an improvement in business conditions decreased from 14.3% in March to 12.8%. Conversely, those expecting business conditions to worsen increased from 18.5% to 19.9%.

This is echoed in the Leading Indicator of Remodeling Activity (LIRA) released in April 2024. Anticipated annual spending on enhancements and repairs for owner-occupied residences is forecasted to decline gradually this year and into the initial quarter of 2025, albeit at a moderated pace. According to the LIRA, expenditures for home renovations and maintenance by owners are predicted to decrease by more than 7% in the third quarter of 2024, followed by a milder decline of 2.6% leading up to the first quarter of 2025. 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.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products – Wood industry is an 11-stock group within the broader Construction sector. The Zacks Wood industry currently carries a Zacks Industry Rank #68, which places it in the top 27% 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 bright 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 top 50% of the Zacks-ranked industries is a result of a higher earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since February 2024, the industry’s earnings estimates for 2024 have increased to $1.85 from $1.78 per share.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

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 19.7% compared with the broader sector’s 46.1% rise. The Zacks S&P 500 Composite has gained 26.4% 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 25.5X versus the S&P 500’s 20.9X and the sector’s 17.8X.

Over the last five years, the industry has traded as high as 39.5X, as low as 12.2X and at a median of 22.3X, 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. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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 #1 (Strong Buy) company — gained 38.2% over the past year. LPX earnings surpassed the consensus mark in three of the trailing four quarters and missed on one occasion, with the average surprise being 18.6%. Earnings projections for 2024 have risen to $5.79 from $4.89 per share in the past seven days, depicting analysts’ optimism about the company’s prospects. LPX earnings are expected to grow 79.8% in 2024.

Price and Consensus: LPX

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 recent successful product launches and continuous brand and marketing investments. These efforts aim to inform consumers about the advantages of switching from wood to Trex decking and railing products. Additionally, Trex’s tiered product strategy — which supports consumers’ decision-making by providing a range of product aesthetics — is encouraging. Its focus on automation, modernization, energy efficiency and raw material processing is expected to be a major tailwind.

TREX — a Zacks Rank #3 (Hold) company — gained 52.3% over the past year. TREX earnings surpassed the consensus mark in all the trailing four quarters, with the average surprise being 16.7%. Earnings projections for 2024 have risen to $2.24 from $2.21 per share in the past 30 days. TREX earnings are expected to grow 20.4% in 2024.

Price and Consensus: TREX

UFP Industries: Headquartered in Grand Rapids, MI, UFP Industries supplies wood, wood composite and other products to retail, industrial, and construction markets. The company has been gaining from its diversity of markets, solid contributions from buyouts and new product innovation. UFPI is committed to elevating all facets of its operations, striving for heightened efficiencies, minimized expenses, and the development of innovative products and services. Apart from inorganic drive, the company plans to foster organic expansion, earmarking investments of up to $300 million in 2024. Around $100 million is allocated for automation and technological enhancements, while another $100 million is designated for new facilities and expanding capacity at current sites.

Importantly, UFPI — a Zacks Rank #3 company — gained 43.3% over the past year. The company’s earnings surpassed earnings estimates in one of the trailing four quarters but missed on three other occasions, leading to the average positive surprise of 3.4%. Yet, the stock has seen a 1.4% upward estimate revision for 2024 earnings over the past seven days. It carries an impressive VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum.

Price and Consensus: UFPI

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Trex Company, Inc. (TREX) : 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.

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