With Lumber Prices At A 15-Month High, Here's One Stock That Can Benefit From An Improved U.S. Housing Recovery

Lumber prices have reached their highest level in more than a year, and Citi analyst Anthony Pettinari believes high lumber prices are here to stay. According to Pettinari, dealers underestimated the strength of the housing market in Q1.

“YTD starts have come in stronger than expected (1153k avg. vs. 1038k LY) with a favorable mix (single-family +18 percent vs. multi-family -2 percent); single family starts typically use ~3x the Wood Product volume of multi-family starts,” Pettinari explained.

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Citi sees several reasons why lumber prices could remain high throughout the summer.

“Besides strong demand amid lean inventories, we think secondary drivers of improved pricing include: 1) anticipated resolution of the Canadian softwood lumber trade dispute, 2) a return of Chinese buyers to the market after a dismal 2015 (imports -3 percent Y/Y with buying weighted towards higher grades of lumber), 3) an early start to the fire season & supply outages (Norbord’s High Level, ALB OSB mill, Canfor’s Houston, BC lumber mill),” Pettinari noted.

In addition, Citi believes that the lumber industry could experience a surge in demand ahead of a potential Canadian duty hike in October.

Citi names Weyerhaeuser Co (NYSE: WY) its top lumber stock pick and likes the company’s pricing power, market positioning, streamlined portfolio and attractive valuation.

Disclosure: The author holds no position in the stocks mentioned.