Lumber prices have made a slow recovery in the past few months as the housing sector remains strong despite high-interest rates. Data by TradingView shows that lumber has recovered from last year’s low of $357.35 to $530. A separate figure by Barchart reveals that the lumber spot price stands at $555.
Lumber prices could keep risingMost importantly, there are signs that investors expect lumber prices will remain at an elevated level for a while. As shown below, lumber futures for March 2025 delivery are trading at $605, which is $50 above the current level.
The main driver for this rally will likely be the housing sector, which is expected to grow gradually this year. The most recent report revealed that housing starts rose to a seasonally adjusted 1.56 million, up from last year’s low of 1.30 million. Similarly, US building permits have remained above 1.4 million in the past few months.
The strength of the housing sector happened at a time when mortgage rates and interest rates jumped. Interest rates moved from zero in early 2021 to 5.50% while the average mortgage rate is nearing 7%.
There is a likelihood that the Federal Reserve will start to cut interest rates later this year, which is a positive sign for the housing sector. Besides, the unemployment rate sits at 3.70% while wage growth is continuing.
Technically, lumber price formed a golden cross pattern in October as the 50-day and 200-day moving averages crossed each other. In most cases, this pattern is usually a bullish sign. Lumber has remained above the two moving averages since then.
Weyerhaeuser stock could benefitWeyerhaeuser (NYSE: WY), a leading $24 billion company, could be a major beneficiary if lumber prices continue rising. For starters, Weyerhaeuser is one of the biggest landowners in the United States. It owns over 12.4 million acres of timberlands in the US. It also manages more acres in Canada.
The company makes money by selling lumber and lumber products and leasing its land to mining companies. And most recently, the company has gotten into a business it calls Climate Solutions, where it sells carbon credits to companies and individuals. This division also deals with bioenergy, conservation, carbon capture, and mitigation banking.
Carbon offsets is a relatively easy and high-margin business where the company sells credits. For example, in December, the company said that it had sold 32,000 carbon credits for $29 per credit. In some cases, selling these credits can be a better cash cow than cutting them for timber. The company aims to generate EBITDA of $100 million in this industry by 2025.
Weyerhaeuser is a value company that has had mixed returns in the past few years. It dropped to $7.5 billion in 2020 and then bounced back to $10.2 billion in 2021.
Therefore, there is a likelihood that Weyerhaeuser’s stock price will benefit from the offsets business and the resilient housing sector. In the last earnings call, Devin Stockfish, the company’s CEO said:
“Even at higher interest rates, we expect single-family demand to hold up reasonably well given the limited inventory of existing homes on the market, combined with the home builders ability to offer mortgage rate buy downs and other incentives.”
The only concern about WY is that it is not a cheap company. It has a trailing PE ratio of 30, which is higher than the sector median of 29. Its EV to EBITDA of 17.90 is also slightly higher than the sector average of 16.95.
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