This is the first lumber stock to capitalize on a booming real estate market
The US real estate market is the hottest it has been since before the Great Recession. Few of the demands are expected to skyrocket for new home construction, which is why lumber prices are skyrocketing.
Instead of worrying about the futures markets, it might be better to invest in leading lumber stocks. Here’s a quick overview of the lumber market, as well as the best lumber stock to buy right now.
A boom like no other
It’s not just the rapid surge in house prices that is raising eyebrows. These are the differences between this real estate market and the hot markets of previous cycles. Large, traditionally flourishing metropolitan areas like Manhattan are seeing lower demand. Meanwhile, interest is booming in a motley patchwork of emerging real estate markets in rural communities and small towns. According to The Wall Street Journal, America’s hottest housing market is Coeur d’Alene, Idaho. People pack their laptops and flock to cities like Spokane, Washington and Billings, Montana. Many companies are now offering their full-time employees to “work from anywhere” as a permanent option. With this as a real choice, a large and growing number of people find themselves in a new situation: their work does not have to dictate where they live.
The result is a continuous exodus from major labor markets unlike anything we’ve seen before. But even though there are fewer constraints now on where people live, there are still serious limitations in terms of housing – and one important factor that keeps homes scarce and expensive is wood.
Why are wood prices at record highs?
On May 3, lumber futures prices reached $ 1,575 per thousand board feet, a record high and an increase of more than four times from year-end 2018 prices. This is one example. classic low supply associated with high demand. Housing starts in the United States are at their highest level since the Great Recession, as Americans rush to buy larger, newer homes.
American homes are built using softwoods such as spruce, fir, and pine which are largely harvested in the Northwest and Canada. For years, Canadian pine beetle infestations ravaged many of these forests. In an effort to use their timber before insects could render it useless, logging was increased, which put downward pressure on timber prices. After years of turning on its supply tap, Canada is now tightening restrictions on logging in an effort to preserve its forests. These coniferous trees can take 30 years to reach a usable size. Given this significant lead time, the supply of Canadian wood will likely be in jeopardy for some time.
Sawmill operators who suffered from the 2008 housing crisis have been slow to build up their inventories. The conservative nature of these businesses means less ability to process lumber into lumber, which has resulted in a large gap between lumber prices and lumber prices. This disparity is another reason the supply is low and the prices of lumber are skyrocketing.
As bad as the lumber supply situation is, it is really the demand side that is causing the shortage. Not only are housing starts on the rise, but average selling prices for existing and new homes have hit record highs as consumers scramble to take advantage of low mortgage interest rates.
Weyerhaeuser’s business model
Based in Seattle and founded in 1900, Weyerhaeuser (NYSE: WY) owns over 11 million acres of timberland in the United States and leases additional acreage in Canada under long-term licenses, making it one of the largest holders of timberland in the world. The company is classified as a real estate investment trust, although this is a bit misleading given that most of its income comes from the sale of logs and the manufacture of wood products.
Weyerhaeuser directly supports the US real estate market by harvesting and replanting trees and turning logs into wood at its sawmills. It also produces engineered wood, oriented strand board plywood and medium density fibreboard. The company posted record first quarter revenue, as well as its highest quarterly net profit in more than five years.
Equally impressive are the Q2 outlook he delivered with his latest earnings report. Management expects its Timberlands Adjusted EBITDA to be comparable to first quarter results, but expects “significantly higher” Adjusted EBITDA from its wood products business (which contributed 80% of its first quarter Adjusted EBITDA). On the first quarter conference call, CFO Nancy Loewe said that “new residential construction activity has remained at very favorable levels and our homebuilder and dealer customers expect a strong second quarter after the already strong first quarter.”
As one of the largest and most established players in the industry, Weyerhaesaer’s strong performance and outlook make it a natural fit to profit from soaring timber prices.
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