RBC Notes May 19, 2021
Forest Products
Channel Check – What Home Centers & Distributors are seeing
Our view: While prices are unlikely to remain at these lofty levels, tales of lumber/OSB's demise seem greatly exaggerated. Based on recent commentary from home centers and building product distributors, demand remains robust, especially in single-family housing. In our view, continued demand strength and a limited ability for the industry to increase production are likely to result in a tight supply-demand balance over the short-to-medium term. This should support pricing well above historical levels, and we recommend accumulating shares on any lumber futures-related weakness given that valuations do not reflect anything close to $1,000+ lumber/OSB. We think West Fraser, Louisiana-Pacific, Interfor, Canfor, and James Hardie all offer good exposure to the strong demand environment.
Home Centers: What we learned from Home Depot and Lowe's
Demand was consistently strong in FQ1 and continued into May – Home Depot and Lowe's posted FQ1 US comps of +30% and +24%, respectively. Home Depot posted US comps of +20% in February, +36% in March, and +32% in April. Lowe's posted US comps of +24% in February, +36% in March, and +14% in April (but still +34% on a 2-year stack). Canadian comps outpaced the US at both companies and lumber was a top performing category for both. Home Depot noted the first two weeks of May saw comps above 30% on a two-year stack. Lowe's hasn't seen any slowdown across the business.
Lumber is still flying of the shelves – Home Depot doesn't see a lot of finished lumber in the distribution channel, so as soon as it hits the store, it sells. Lowe's has worked to secure new sources of additional supply to ensure the company maintains a competitive in-stock position, which has helped strengthen relationships with Pro customers. The company continues to see strong lumber demand.
Pro sales are slightly outpacing DIY demand – While both buying segments remain strong, Home Depot noted that Pro sales are slightly outpacing DIY as Pro customers are experiencing strong project demand and growing backlogs. DIY demand remains consistent from levels seen in the second half of last year. Lowe's highlighted that its Pro comps were above 30% during the quarter.
Distributors: What we learned from Boise Cascade, Builders FirstSource, BlueLinx, and CanWel
Distributors see lasting strength into the summer on strong demand and long order files – Overall, we found that distributors see strength going forward with strong sales continuing into the second quarter. CanWel noted that order files remain long with lumber being consumed as fast as its produced. The company sees pricing strength into the summer. BlueLinx highlighted a similar story, noting that they don't expect a market shift until July. Builders FirstSource is seeing strong demand from homebuilders, although some have limited sales due to material and labor constraints. Boise Cascade is seeing steady R&R demand, while CanWel expects strong DIY treated wood demand to continue into Q2.
Inventories are being kept lean, which isn’t hard with limited availability – BlueLinx noted that they are keeping inventories lean while tightening purchasing times and maximizing the level of cosigned inventory to reduce price risk. CanWel similarly noted that increased prices have increased demands on working capital. The company has leveraged contract volumes as spot availability has been poor. Builders FirstSource noted that it has been challenging to get the supply they need, especially for OSB.
There hasn’t been much demand destruction from record pricing – Boise Cascade noted that momentum in single family housing seems to be accelerating despite increased commodity prices; however, there could be some delays in multi-family and commercial projects. Builders FirstSource doesn't see any demand destruction as there is "virtually unlimited demand" for single-family homes. BlueLinx noted optimism in the housing market, but escalating prices should eventually curb demand.