Image: Bigstock

Spending on home repair and remodel (R&R) activities has decreased from the peaks seen during the pandemic, given high rates. The surge in interest rates has resulted in a substantial number of potential homebuyers being unable to afford properties in the U.S. housing market.

This, in turn, has created challenging demand conditions for companies within the Zacks Building Products – Wood industry. Nonetheless, there remains a persistent need for investment in critical replacements, addressing home performance deficiencies, and modernization efforts in the nation's aging homes.

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 UFP Industries, Inc. (UFPI - Free Report), Louisiana-Pacific Corporation (LPX - Free Report), and JELD-WEN Holding, Inc. (JELD - Free Report).

Description of the Industry

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.

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 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.

Although consumer confidence — a key indicator of economic health — rose in July, consumers’ assessment of current conditions saw a slight decline. This is echoed in the recently released report by the Leading Indicator of Remodeling Activity (LIRA). Anticipated annual spending on enhancements and repairs for owner-occupied residences is forecasted to decline gradually this year, albeit at a moderated pace.

The LIRA predicts that annual spending on renovations and maintenance for owner-occupied homes will decrease 0.5% through the second quarter of 2025. 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.

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.

The Zacks Industry Rank Indicates Dull Prospects

The Zacks Building Products – Wood industry is an 8-stock group within the broader Construction sector. The Zacks Wood industry currently carries a Zacks Industry Rank #240, which places it in the bottom 4% 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 May 2024, the industry’s earnings estimates for 2024 have decreased to $1.57 from $1.88 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 recent valuation.

The Industry Lags the 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 lost 2.6% against the broader sector’s 25.8% rise. The Zacks S&P 500 Composite has gained 19.2% over this period.

One-Year Price Performance

Image Source: Zacks Investment Research

The 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 23.3X versus the S&P 500’s 20.7X and the sector’s 17.1X.

Over the last five years, the industry has traded as high as 40.3X, as low as 11.9X, and at a median of 21.9X, as the chart below shows.

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

Image Source: Zacks Investment Research

3 Wood Stocks to Keep an Eye On - 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.

Louisiana-Pacific — a Zacks Rank #3 (Hold) company — gained 50.4% over the past year. The company's earnings surpassed the consensus mark in all the trailing four quarters, with the average surprise being 25.2%. Louisiana-Pacific's earnings are expected to grow 59.3% in 2024.

Price and Consensus: LPX

Image Source: Zacks Investment Research

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.

UFP Industries 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 the inorganic drive, the company plans to foster organic expansion, earmarking investments for packaging for vertical integration and expansion, for the Deckorators brand, and for the construction of housing support, facility expansion, automation, and new product development.

Importantly, UFP Industries — a Zacks Rank #3 (Hold) company — gained 16.9% over the past year. The company’s earnings surpassed earnings estimates in two of the trailing four quarters but missed on other two occasions, leading to the average positive surprise of 4.6%. 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

Image Source: Zacks Investment Research

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-WEN Holding 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, the company has streamlined workstreams for long-term profitable growth by optimizing the production network and investing in products and services to better serve customers.

JELD-WEN — a Zacks Rank #3 (Hold) company — has gained 12.8% over the past year. JELD-WEN's 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

Image Source: Zacks Investment Research

More By This Author: