Pent-Up Demand Drives Lumber Prices Higher; Here Are 2 ‘Strong Buy’ Stocks That Could Benefit

Housing construction spiked unexpectedly in August, with 1.575 million new units started, well above the 1.445 million forecast.

For investors, the situation can open up opportunities. Housing depends on several key commodities, such as lumber and cement. In fact, on Tuesday, lumber prices rose ~6% in the commodity markets amid increased demand.

It brings up a situation in which investors can make gains on lumber stocks, and Wall Street’s analysts are taking a closer look at lumber companies. Using the TipRanks database, we’ve found two of their recent lumber picks – Strong Buy stocks with at least 30% upside potential. Let’s dive in.

West Fraser Timber (WFG)

The first lumber company in our sights is West Fraser Timber, based in Vancouver, BC. This company focuses on the production of two main product lines, lumber and engineered wood products. Lumber is self-explanatory, including usable boards and beams made of spruce, pine, and other construction-grade woods. Engineered woods are more specialty products, and include plywood, particle board, and oriented strand board, along with wood chips, pulp, and newsprint. West Fraser has operations in the Canadian Rockies of BC and Alberta, in the Pacific Northwest, in the Southeastern US, in the Great Lakes region, and even in Scotland.

In the recently reported 2Q22, West Fraser’s numbers fell year-over-year, but came in above expectations. At the top line, the company had total revenues of $2.88 billion, which supported earnings of $762 million. The earnings net translated to $7.59 per diluted share. EPS had been expected at $6.88.

West Fraser returned large amounts of capital to its shareholders. The company has an active share repurchase program, and in Q2 it bought back some 16 million shares for a total of $1.475 billion. West Fraser also pays out a regular common share dividend, which it has been slowly increasing over the past three years. The most recent declaration was for 29 cents per share; at that rate, the dividend annualizes to $1.16 and yields 1.5%.

All of this adds up to a sound foundation for the stock, according to 5-star analyst Paul Quinn, of RBC Capital.

“While record profitability and large return of capital events are likely in the rearview mirror for now, we continue to like West Fraser’s low-cost positioning as the cycle turns, and note potential valuation tailwinds as solid balance sheets across much of the sector help drive consolidation… We expect West Fraser will monitor OSB market conditions carefully as it aims to restart the Allendale mill in Q123,” Quinn noted.

Along with these comments, Quinn puts an Outperform (i.e. Buy) rating on WFG shares, and a price target of $120, implying an upside of 55% for the year ahead. (To watch Quinn’s track record, click here)

Overall, West Fraser shares get a unanimous Strong Buy consensus rating from the Street’s analysts, based on 4 positive analyst reviews. The shares are trading for $77.24 and their average price target of $110.52 suggests a gain of 43% in the next 12 months. (See WFG stock forecast on TipRanks)

UFP Industries, Inc. (UFPI)

The second stock we’ll look at is UFP Industries. This company has been in the lumber business since 1955, and from its Grand Rapids, MI, headquarters it operates through three subsidiaries, UFP Industrial, UFP Construction, and UFP Retail. These subsidiaries provide lumber and value-added wood product solutions for customers worldwide, in areas of industrial use and construction, home construction, and retail solutions for building products providers.

UFP Industries has posted consistent year-over-year growth in revenue and earnings over the past couple of years. The company’s most recent release, from 2Q22, showed total revenues of $2.9 billion, a company record, and up 7% from 2Q21 based mainly on increases in the price of lumber. Net earnings came to $203 million. The diluted EPS of $3.23 was up 16% y/y. Drilling down, we find that UFP reported new product sales of $181 million, up 37% from the year-ago quarter, and an increase in the total sales listed as ‘value-added’ from 54% to 62%.

Both the revenues and earnings came in well ahead of the forecasts. The diluted EPS was particularly notable, beating the expectations by over 43%.

UFP paid out its last dividend on September 15, at 25 cents per common share. The annualized payment of $1 gives a yield of 1.3%.

All of this caught the attention of D.A. Davidson analyst Kurt Yinger, who laid out a bullish take on the stock: “After cutting our forecasts recently to reflect a more challenging 2023 demand backdrop, we are now raising them, primarily reflecting increased confidence in the durability of Industrial segment margins. In the quarter, UFPI continued to demonstrate their ability to navigate and deliver in any lumber pricing environment, as well as the benefits of a diversified end-market mix and balanced product portfolio.”

“While we still expect top and bottom-line declines in 2023, recent performance only reinforces our confidence in UFPI’s ability to weather market challenges, and a rock solid balance sheet provides the flexibility to pursue opportunistic M&A,” the analyst added.

Yinger backed his bullish stance with a Buy rating on UFPI stock, and his price target, set at $101, indicates potential for a 37% one-year gain. (To watch Yinger’s track record, click here)

Overall, UFPI has acquired 3 recent analyst reviews and they are all positive, for a unanimous Strong Buy consensus rating. Shares are trading for $73.63, while the stock’s average price target of $103.67 implies ~41% upside on the one-year horizon. (See UFPI stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.