Chicago, IL – February 21, 2024 – Today, Zacks Equity Research discusses Trex Company, Inc. TREX, Boise Cascade Co. BCC, Louisiana-Pacific Corp. LPX and JELD-WEN Holding, Inc. JELD.
Industry: Building Products - Wood
Link: https://www.zacks.com/commentary/2228377/4-wood-stocks-worth-watching-in-a-resilient-industry
Favorable housing market conditions, buoyed by increasing consumer confidence stemming from expectations of interest rate cuts and moderated inflation, provide a positive outlook for the Zacks Building Products – Wood industry. Moreover, companies within this industry are anticipated to capitalize on favorable demand in repair and remodel (R&R) activities, as well as increased funding for infrastructure and carbon/ESG-related projects.
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., Boise Cascade Co., Louisiana-Pacific Corp. and JELD-WEN Holding, Inc.
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.
Improving Housing & R&R Market & Higher Spending on Carbon/ESG Projects: The industry’s prospects are highly correlated with the U.S. housing market conditions. Lack of existing homes for sale, declining inflation rates, anticipated future interest rate cuts, and positive employment conditions have been bolstering consumer sentiment as well as the prospects for the U.S. housing market.
In January 2024, the Conference Board's Consumer Confidence Index surged to an impressive 114.8, showcasing a significant increase from December's revised figure of 108.0. This marks the third consecutive monthly rise in consumer confidence, signaling a trend that could sustain momentum in household spending throughout the year. Consequently, participants in the wood industry stand to benefit from this trend.
Also, the R&R market (considered one of the largest in terms of lumber demand) has been impressive. 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. 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.
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.
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 #59, which places it in the top 24% 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.
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.
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 19.4% compared with the broader sector’s 42.7% rise. The Zacks S&P 500 Composite has gained 25.5% over this period.
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 27.2X 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 39.5X, as low as 12.2X and at a median of 22.3X.
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.
Boise Cascade Company: Based in Boise, ID, this company makes wood products and distributes building materials in the United States as well as Canada. BCC remains well-positioned for 2024 to execute the growth initiatives that started in 2022. The company has been demonstrating a balanced approach to capital allocation, including the ability to pursue additional growth initiatives that align with strategy.
Boise Cascade has also been increasing commodity offerings that will instill growth in the existing and underserved markets, and across its entire national footprint. The recent acquisition of BROSCO reinforces BMD's expansion efforts in the door and millwork sector, providing the company with instant market presence and increased scale in the Northeastern markets.
Importantly, BCC — a Zacks Rank #1 (Strong Buy) company — gained 104.6% over the past year. The company’s earnings surpassed earnings estimates in three of the trailing four quarters but missed on one occasion, leading to the average surprise of 20.3%. The stock has seen a 2.6% upward estimate revision for 2024 earnings over the past 30 days. It carries an impressive VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum.
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 #2 (Buy) company — gained 80.2% over the past year. TREX earnings surpassed the consensus mark in all the trailing four quarters, with the average surprise being 16.9%. Earnings projections for 2024 have risen to $2.20 from $2.18 per share in the past 60 days, depicting analysts’ optimism about the company’s prospects. It also carries an impressive VGM Score of B.
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 20.8% 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 106.2%. Earnings projections for 2024 have risen to $3.84 from $3.68 per share in the past seven days. LPX earnings are expected to grow 19.3% in 2024. It also carries an impressive VGM Score of A.
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 47.8% over the past year. JELD earnings surpassed the consensus mark in all the trailing four quarters, with the average surprise being 126.5%. JELD earnings are expected to grow 10.1% in 2024. This company carries an impressive VGM Score of A.
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Louisiana-Pacific Corporation (LPX) : Free Stock Analysis Report
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