The demand for lumber to renovate and improve existing homes and do-it-yourself projects increased significantly over the last year because people spent more time at home. Also, the red-hot housing market led to high demand for lumber. However, as sawmills could not operate at full capacity during the worst of the COVID-19 pandemic, supply remained under pressure, causing a spike in lumber prices. In May, lumber prices hit a $1,670.50 per thousand board feet all-time high, increasing six times from the low it hit in April 2020. However, prices declined more than 40% in June—the worst monthly decline since 1978.
As people now focus on vacations and other outdoor activities after staying indoors for more than a year, demand for home remodeling has decreased. At the same time, the reopening of sawmills has led to an increase in supply. However, since the housing boom is expected to persist, analysts expect lumber prices to normalize by year's end. Furthermore, lumber prices are still up 100% versus the spring of 2020.
Since lumber prices are expected to rebound soon, we think it could be wise to bet on fundamentally sound lumber stocks West Fraser Timber Co. Ltd. (WFG), PotlatchDeltic Corporation (PCH), Boise Cascade Company (BCC), and Lumber Liquidators Holding Inc. (LL).
West Fraser Timber Co. Ltd. (WFG)
WGF is a diversified wood products company that is based in Vancouver, Canada. It manufactures and distributes timber, panels, pulp, and paper across western Canada and the southern United States. The company operates through various segments, including lumber, panels, pulp & paper, and corporate & others. In addition, it offers treated wood products, newsprint, wood chips, other residual and energy products, and bioproducts.
In April, the company announced that its wholly owned subsidiary, Norbord Inc., will redeem Norbord's outstanding notes, due July 15, 2027. WFG expects the redemption to reduce its debt and help optimize its capital structure.
WFG’s sales increased 163.3% year-over-year to $2.34 billion in the first quarter, ended March 31, 2021. Its operating earnings grew significantly from their year-ago value to $879 million, while its net income improved significantly year-over-year to $665 million over this period. The company’s EPS came in at $6.96 compared to a $0.09 net loss per share in the prior year period.
A $28.35 consensus EPS estimate for the current year represents a 193.1% improvement year-over-year. Analysts expect WFG's revenue to increase 127.2% year-over-year to $10.46 billion in its fiscal year 2021. The stock has gained 34.1% over the past year and 28.1% year-to-date.
WFG’s POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
WFG is rated an A grade for Growth, and a B for Momentum and Quality. Within the A-rated Industrial - Wood industry, it is ranked #3 of 6 stocks.
To see additional POWR Ratings for Sentiment, Value, and Stability for WFG, click here.
Click here to check out our Industrial Sector Report for 2021
PotlatchDeltic Corporation (PCH)
PCH is a real estate investment trust (REIT) that is involved primarily in forest management operations, such as the sale of timber, timberland management, and timberland purchase and sale. The Spokane, Wash., company operates through three business segments: resource, wood products, and real estate. It is also involved in the manufacturing and selling of wood products.
During the first quarter, ended March 31, 2021, PCH’s revenue increased 69.6% year-over-year to $354.2 million. Its net income was $131.1 million, versus a $16.8 million net loss in the prior-year period. Its EPS amounted to $1.94 for this quarter, compared to a $0.25 loss per share in the first quarter of 2020. The company's adjusted EBITDA increased 309.7% from the year-ago value to $195 million over this period.
PCH is expected to see 34.1% revenue growth for the current year. Furthermore, PCH has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. Its EPS is estimated to increase 177.7% year-over-year to $6.86 in 2021. Over the past year, PCH’s stock has gained 21.8%. And it has gained 11.2% over the past nine months.
PCH’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. PCH has a B grade for Growth and Value. Among the 53 stocks in the REITs – Diversified industry, it is ranked #3.
Click here to see the additional POWR Ratings for PCH (Sentiment, Quality, Momentum, and Stability).
Boise Cascade Company (BCC)
BCC in Boise, Idaho is a full-service wood product manufacturer and building materials distributor with facilities across the United States and Canada. Wood Products, Building Materials Distribution, and Corporate and Other are the three segments through which the company operates. New residential construction, home repair and renovation projects, light commercial construction, and industrial applications are where the company's products are most widely utilized.
This month, BCC unveiled its new website for its millwork business. The website will feature exterior and interior doors and finish options, door hardware, and other related goods. This should enable the company to provide its consumers with easy access to a wide range of product literature, videos, technical and warranty information, while also enhancing its brand image.
During the first quarter, ended March 31, 2021, BCC’s sales increased 55.6% year-over-year to $1.82 billion. Its income from operations increased 703.5% year-over-year to $205.26 million, while its net income surged significantly from the prior-year quarter to $149.16 million. Its adjusted EBITDA grew 277.3% from the prior-year quarter to $224.94 million.
The company's EPS is expected to grow 165.3% year-over-year to $11.78 in the current year. In addition, analysts expect BCC's revenue to increase 26.1% year-over-year to $6.91 billion in its fiscal year 2021. BCC's stock has gained 7.1% over the past year and 22.7% over the past nine months.
It is no surprise that BCC has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The stock also has an A grade for Growth and Value, and a B for Momentum and Quality. In the A-rated Industrial - Wood industry, it is ranked #2 of 6 stocks.
In addition to the POWR Ratings grades I have just highlighted, one can see the BCC rating for Stability and Sentiment here.
Click here to check out our Industrial Sector Report for 2021
Lumber Liquidators Holding Inc. (LL)
LL is a multi-channel specialty retailer of hardwood flooring and accessories for hardwood floors. The company sells hardwood species, engineered hardwood, laminate, and resilient vinyl flooring to consumers directly. In addition, it has a wide range of product categories, including solid and engineered hardwood, cork, vinyl plank, and others, moldings and accessories, and non-merchandise services. LL is based in Richmond, Va.
Last month, LL announced the opening of new stores in Beckley, W.Va., and Hattiesburg, Miss. With the addition of the two new locations, the company now has 416 locations across the United States. The new stores might enable LL to provide a seamless experience to its customers. For example, they have design centers with video capabilities, where store staff can work with clients to discover the perfect any concept or project and visualize it using its “Picture It” floor visualizer.
LL’s net sales increased 6% year-over-year to $283.45 million in the first quarter, ended March 31, 2021. Its operating income grew 49.5% from the year-ago value to $13.11 million. The company's net cash from operating activities increased 23.7% year-over-year to $44.50 million. And the company’s cash and cash equivalents increased 831.4% year-over-year to $208.86 million over this period.
LL’s EPS is expected to grow 5.2% year-over-year to $1.42 in its fiscal year 2022. Analysts expect LL’s revenue to increase 8.1% in the current year.
LL’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our POWR Ratings system. LL also has an A grade for Value and Momentum, and a B for Growth and Quality. The stock is ranked #8 of 64 stocks in the A-rated Home Improvement & Goods industry.
Beyond the POWR Ratings grades I have just highlighted, one can see the LL ratings for Sentiment and Stability.
WFG shares were trading at $67.45 per share on Tuesday morning, up $1.17 (+1.77%). Year-to-date, WFG has gained 4.97%, versus a 15.82% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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