Chicago, IL – January 27, 2025 – Today, Zacks Equity Research discusses Weyerhaeuser Company WY, Louisiana-Pacific Corp. LPX and PotlatchDeltic Corp. PCH.
Link: https://www.zacks.com/commentary/2401949/3-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. Residential remodeling is anticipated to capitalize on the recovering housing market and the stabilization of material costs in 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 consumers' cautious approach, efficient cost management, a steadfast commitment to product innovation, and strategic acquisitions are expected to support industry players such as Weyerhaeuser Company, Louisiana-Pacific Corp. and PotlatchDeltic Corp..
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.
Higher Spending on Infrastructure & Carbon/ESG Projects: The projected rate cuts are poised to increase affordability, stimulate residential activity and set the stage for growth in the wood industry. Additionally, government initiatives such as the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA) are expected to boost infrastructure spending. This emphasis on modernization and clean energy is anticipated to drive growth for companies within the wood sector.
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: 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 remains low and interest rates remain at their highest level in over two decades. Although the Federal Reserve reduced the rate (bringing it to a range of 4.25%-4.5%), mortgage rates remained elevated at 7%.
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 year. The housing and repair markets could see a recovery driven by potential market stabilization and anticipated reductions in interest rates.
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 a nine-stock group within the broader Construction sector. The Zacks Wood industry currently carries a Zacks Industry Rank #91, which places it in the top 36% 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 optimistic 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 October 2024, the industry's earnings estimates for 2025 have increased to $2.87 per share from $2.16.
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 16.8% compared with the broader sector's 22.6% 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 23.7 versus the S&P 500's 22.49 and the sector's 18.13.
Over the last five years, the industry has traded as high as 26.73X, as low as 12.17X and at a median of 19.33X.
We have highlighted three stocks from the industry that have been capitalizing on fundamental strengths.
Weyerhaeuser: This Seattle, WA-based company is one of the world's largest private owners of timberlands. Weyerhaeuser is reaping the rewards of its emphasis on operational excellence, cost management, and long-term growth strategies. Additionally, the company is optimistic about the growing momentum in voluntary carbon markets and is well-positioned to leverage the rising demand for high-quality credits.
Its commitment to enhancing shareholder value and expanding into emerging markets, such as India and Vietnam, further strengthens its position. However, challenges such as higher lumber manufacturing and raw material costs, weather-related risks, and delays in renewable energy and CCS projects remain concerns. Despite these hurdles, Weyerhaeuser is benefiting from improved market fundamentals in the lumber and OSB sectors.
WY — a Zacks Rank #1 (Strong Buy) company — lost 10.1% over the past year. Nonetheless, WY has seen an upward estimate revision for 2025 earnings to 83 cents from 78 cents per share over the past 30 days. The Zacks Consensus Estimate for its 2025 earnings per share (EPS) is expected to register 71% year-year-year growth. WY earnings surpassed the consensus mark in three of the trailing four quarters and missed on one occasion, with the average surprise being 41.6%. You can see the complete list of today's Zacks #1 Rank stocks here.
PotlatchDeltic: Headquartered in Spokane, WA, PotlatchDeltic is a leading REIT. PotlatchDeltic maintained robust liquidity levels, supporting its strategic priorities, including capital return to shareholders through dividends and share repurchases. Forward-looking optimism stems from potential market stabilization and expected interest rate reductions, which may catalyze recovery in housing and repair markets. Emerging opportunities in solar development and lithium exploration underpin future growth potential.
PCH — a Zacks Rank #2 (Buy) company — has lost 10.2% over the past year. The Zacks Consensus Estimate for 2025 EPS is expected to register 281% year-year-year growth. PCH earnings surpassed the consensus mark in two of the trailing four quarters, met in one and missed on one occasion, with the average surprise being 50%.
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 2025 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 77.6% over the past year. LPX has seen an upward estimate revision for 2025 earnings to $5.37 from $5.13 per share over the past 30 days. The Zacks Consensus Estimate for 2025 EPS is expected to register a 4% year-year-year decline. LPX earnings surpassed the consensus mark in all the trailing four quarters, with the average surprise being 30.7%. It carries an impressive VGM Score of B. This helps to identify stocks with the most attractive value, growth and momentum.
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