Wood Industry's Near-Term Prospects Dimmed by Coronavirus

The Zacks Building Products – Wood industry includes forest product companies as well as 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. The industry also includes timberland real estate investment trust or REITs.

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 and repair and remodeling (R&R) activity. Any untoward situation influencing the construction and housing sectors will impact the industry participants’ financials. Now the bleak near-term prospects of the housing market amid the coronavirus-induced escalating economic uncertainties tarnish the wood industry players’ entire mix of businesses, including lumber, Oriented Strand Board (OSB), and timber. Drop in harvest volumes owing to lower demand and lumber prices are potent headwinds in the near term.
  

• Due to the coronavirus impact, prices of most wood products, including lumber, plywood and OSB will be less favorable in the near term for companies. Historically, volatility in lumber price has been a major concern for the wood industry. Any 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. Meanwhile, the timberland business is governed by federal rules and state forestry commissions, which are subject to frequent changes, affecting businesses. Further, due to the very nature of their properties, timberland REITs are required to follow eco-friendly mandates in their trade.
  

• Nonetheless, the industry stands to benefit from increased government spending on infrastructure projects and strong gains from repair and remodeling activity. Despite the uncertainties arising from the pandemic, repair and remodel market (considered one of the largest markets of lumber demand) has been going strong. Under “working-from-home” or “stay-at-home” orders, consumers are prioritizing home improvement projects that are driving demand. Also, the companies have been experiencing higher demand for exporting southern yellow pine logs to China as waivers have been granted for the 25% tariff. Meanwhile, 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.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Building Products – Wood industry is a 13-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 #159, which places it in the bottom 37% 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 February 2020, the industry’s earnings estimates for 2020 and 2021 have been revised 58.3% and 13.9%, respectively, downward.

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 & S&P 500

The Zacks Building Products – Wood industry has underperformed the broader Zacks Construction sector as well as the Zacks S&P 500 composite over the past year.

Over this period, the industry has lost 15.8% compared with the S&P 500’s decline of 0.7% and the broader sector’s 11% fall.

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 36.6X versus the S&P 500’s 20.6X and the sector’s 16X.

Over the last five years, the industry has traded as high as 36.6X, as low as 17.2X and at the median of 24.1X, as the chart below shows.

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

 


Bottom Line

The U.S. housing market slowdown owing to economic disruptions will hinder growth. Apart from lower demand, reduced prices for most wood products remain a headwind. Moreover, stringent regulations in the timberlands business raise concerns for the industry.

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

CatchMark Timber Trust, Inc. (CTT): Based in Norcross, GA, this REIT sports a Zacks Rank #2 (Buy). Loss estimates for 2020 have narrowed down to 23 cents per share from 21 cents over the past 60 days. The Zacks Consensus Estimate for 2020 bottom line suggests year-over-year growth of 87.9%.

Price and Consensus: CTT

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

Louisiana-Pacific Corporation (LPX): Headquartered in Nashville, TN, this company manufactures building products primarily for use in new home construction, repair and remodeling, and outdoor structure markets. The Zacks Consensus Estimate for its 2020 earnings indicates year-over-year growth of 164.9%.

Price and Consensus: LPX

PotlatchDeltic Corporation (PCH): This company is a leading real estate investment trust. Its estimates for 2020 earnings have witnessed upward revision of 130% in the past 30 days. The company has an attractive dividend payout of 4.89% versus industry’s 1.32%.

Price and Consensus: PCH

Trex Company, Inc. (TREX): Headquartered in Winchester, VA, this company 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 0.4% in the past seven days. The company’s trailing 12-month return on equity or ROE of 36.7% compares with the industry’s 5.3%.

Price and Consensus: TREX

Below is one stock with a bearish Zacks Rank that we would recommend investors to steer clear of for the time being.

UFP Industries (UFPI): Headquartered in Grand Rapids, MI, UFP Industries supplies wood, wood composite and other products in retail, industrial, and construction market. This Zacks Rank #4 (Sell) company’s 2020 earnings per share are expected to decline 14.4%.

Price and Consensus: UFPI

5 Stocks Set to Double

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Today, See These 5 Potential Home Runs >>

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Universal Forest Products Inc (UFPI) : Free Stock Analysis Report
 
Trex Company Inc (TREX) : Free Stock Analysis Report
 
Potlatch Corporation (PCH) : Free Stock Analysis Report
 
LouisianaPacific Corporation (LPX) : Free Stock Analysis Report
 
CatchMark Timber Trust Inc (CTT) : Free Stock Analysis Report
 
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