Supply-demand imbalance is the number one reason for volatility in commodity markets and the wood market is no different. Still, given that wood product prices have been on a secular upward trend since the 2008-2009 recession (after essentially flatlining between the early 90s’ and then), there could be long-term value in this segment.
As we are more or less aware, it is the construction market that drives the wood market. Although a large chunk of demand (around 2/5th) comes from repair/remodeling, construction is still the larger segment. And within construction, the commercial side is relatively more stable than residential.
The residential construction market is mainly driven by demographic changes, including the population size, population growth, population age and the rate of immigration. According to the 2020 census, the U.S. population has increased 6.3% over the past decade with the growth rate slowing steadily from 2015 onward.
The low growth should have led to excess inventory. But that didn’t happen because of the protracted impact of the last recession that saw a 61% decline in lending to builders and land developers between the beginning of 2008 and end of 2019. This in turn pushed many builders and land developers out of the market.
As a natural follow-on, the industry also lost a large percentage of its skilled labor (there were still 300K open positions toward the end of 2019). As natural follow-on number 2, with fewer land developers on the market, there are fewer lots available for construction.
NAHB data shows that most of the weakness was in the singe-family entry-level segment: single family housing starts went from 9.3 million in the 1960s (47,977 per million population) to 6.8 million starts in the 2010s (21,288 per million).
Of course, these changes in the housing market had a significant impact on the wood market as well. So wood prices fell sharply during the recession, but production cuts allowed a more or less steady recovery since then, despite the construction market falling behind. But there has to be some point when construction catches up with the huge pent-up demand from all the Gen-Xs and Gen-Zs. And it won’t be possible until there’s significantly higher supply.
The Federal Reserve Board says that North American softwood sawmill capacity has now reached its highest levels since the recession, with 1.4 billion board feet being added within the past year itself (1.1 billion board feet is in Southern U.S., where timber is amply available). A number of wood companies are in the process of expanding existing capacity because these projects can be completed within 12-24 months.
But the American Wood Council says that lead times on new equipment continue to stretch out, with machinery being back-ordered up to 24 months in some cases (extending the typical period taken for the completion of such projects). So this capacity is expected some time in 2022. Once capacity is available to meet the strong construction demand, companies can see steadier growth in revenue and profits.
So much for the big picture.
Wood prices are holding up today because companies are adjusting utilization rates to match construction and repair-remodeling trends. So we see that while capacity utilization in the U.S. improved only slightly from 85% in 2019 to 86% in 2020, Canadian capacity utilization dropped from 79% to 77%. Canadian utilization picked up strongly in the initial months of 2021, but recent fires in British Columbia are likely to lead to additional softness in supply.
Labor remains a limiting factor both at the saw mills and at the transportation companies that need drivers to transport the logs to the saw mills and finished products to the construction or home improvement centers. This could lead to short-term impact on prices.
Given all of the above, it goes without saying that the wood segment is great place to invest in right now. So here are a few stocks worth considering-
Boise Cascade (NYSE:BCC), L.L.C. BCC
Boise Cascade Company manufactures wood products and distributes building materials. The company manufactures engineered wood products, plywood, lumber and particleboard and distributes wood products, such as decking, EWP, lumber, panel, particleboard, and MDF products. It operates in the United States and Canada.
The shares carry a Zacks Rank #1 (Strong Buy) rating with 2021 and 2022 estimates climbing 163.4% and 68.4%, respectively in the last 90 days.
Floor & Decor Holdings, Inc. FND
Floor & Decor Holdings is a multi-channel specialty retailer of hard surface flooring and related accessories offering a broad assortment of tile, wood, laminate and natural stone flooring.
The Zacks Rank #1 company’s 2021 earnings estimate is up 22.2% in the last 90 days. The 2022 estimate is up 14.5%.
Potlatch Corporation PCH
Potlatch Corporation is a Real Estate Investment Trust (REIT) owning timberland in Alabama, Arkansas, Idaho, Minnesota and Mississippi. So its revenue comes through long-term stewardship of its forest resources. The company also conducts a land sales and development business and operates wood products manufacturing facilities through its taxable REIT subsidiary.
The Zacks Rank #1 company has seen its 2021 estimate almost doubling from $3.77 to $7.93 within the last 90 days. The estimate for 2022 almost tripled from $1.48 to $4.03.
Weyerhaeuser Company (NYSE:WY) WY
Weyerhaeuser Company is one of the leading forest product companies with operations primarily concentrated in Southern California, Nevada, Washington, Texas, Maryland and Virginia. The company grows and harvests trees, builds homes and manufactures forest products worldwide, primarily to be used as lumber, pulp and paper, and other wood and building products. It offers logs, hardwood lumber, timber, poles and plywood, as well as minerals, oil, gas, seeds and seedlings. Its products are sold in the United States, Canada, Japan, Europe and other regions.
The 2021 Zacks Consensus Estimate for this #1-ranked stock jumped 87.8% in the last 90 days. The 2022 estimate jumped 71.2%.
Louisiana-Pacific (NYSE:LPX) Corporation LPX
Louisiana-Pacific Corp. is a leading manufacturer of sustainable, quality engineered wood building materials, structural framing products and exterior siding for use in residential, industrial and light commercial construction. Currently, the company operates 20 modern, strategically located facilities in the United States and Canada, two in Chile and one in Brazil.
It also operates facilities through a joint venture. The company’s sells into new home construction, repair/remodeling and outdoor structures markets.
The shares carry a Zacks Rank #2 (Buy). The Zacks Consensus earnings estimate for 2021 is up 114.5% in the last 90 days. The 2022 estimate is up 25.6%.
Masonite International (NYSE:DOOR) Corporation DOOR
Masonite International is a designer and manufacturer of interior and exterior doors. It offers residential molded, flush, stile and rail, louvre and specially-ordered commercial and architectural doors and exterior residential steel, fiberglass, wood doors and entry systems. Its customers include remodeling contractors, builders, homeowners, retail dealers, lumberyards, commercial and general contractors and architects wither at the wholesale or retail levels.
The Zacks Rank #2 company has seen a 6.0% increase in its 2021 estimate and a 9.7% increase in its 2022 estimate in the last 90 days.
Trex Company (NYSE:TREX), Inc. TREX
Trex is a manufacturer of wood-alternative decking and railing.
The Zacks Rank #2 company’s estimate for 2021 earnings is up 11.4% in the last 90 days. The 2022 estimate is up 10.1%.
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