Louisiana-Pacific Corporation LPX is poised to benefit from strong operational execution across the business, coupled with ongoing focus on value-add, as well as high-margin siding and specialty products. Shares of Louisiana-Pacific have outperformed the Zacks Building Products - Wood industry, to which it belongs to, over the past year. In fact, earnings estimates for the current and next year have also been displaying an upward trend, having moved 4.7% and 5% north, respectively, over the past 30 days. This depicts analysts’ optimism surrounding the company’s earnings growth potential.
Let’s delve deeper and try to consider the factors working in favor of this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Focus on Higher-Margin Products: Since the first quarter of 2018, the company has been actively focusing on higher value-add, along with high-margin Siding and specialty products. The company believes that this will lead to more consistent and sustainable results, greater growth opportunities, a stronger margin profile and increased shareholder value. This continued focus on shifting its sales mix, especially OSB, led to strong results in the third quarter, with value-added sales volumes improving 8% from the year-ago level. Notably, diversification of sales mix by including more specialty OSB is a key focus area of Louisiana-Pacific, as these products generate stronger and more stable margins through the cycle.
Strong Pricing to Drive Growth: Indeed, rising raw material costs are pressing concerns for Louisiana-Pacific and its industry peers. Nonetheless, robust pricing and demand across the company’s Siding, Engineered Wood Products or EWP and South America are expected to offset the adverse impact of increased input costs, and thereby drive growth. On the third-quarter 2018 conference call, the company predicted that pricing is likely to remain high across all market segments. In the third quarter, pricing remains strong for strand and fiber SmartSide within the Siding segment. During the quarter, it achieved 16% revenue growth for SmartSide Strand. Louisiana-Pacific remains on track to deliver 12-14% revenue growth in the fourth quarter.
The Zacks Consensus Estimate for 2018 earnings of $2.92 per share reflects an estimated growth rate of 25.3%.
Solid VGM Score & Superior ROE: The company has an impressive VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics.
Meanwhile, Louisiana-Pacific’s return on equity (“ROE”) supports its growth potential. Its ROE of 27.8% compares favorably with the industry’s average of 18%, implying that it is efficient in using shareholder funds.
Headwinds: Rising material costs are growing concerns for Louisiana-Pacific. Wood fiber, whose primary source is timber, is the primary raw material used by the company. Volatility in lumber prices has been a major concern for Louisiana-Pacific, Universal Forest Products, Inc. UFPI, Weyerhaeuser Company WY, Trex Company, Inc. TREX and other industry players of late. The cost of different varieties of wood fiber is subject to volatility owing to governmental, economic or industry conditions. Lumber price, which touched record high of $639 per 1,000 board feet in May 2018, is currently trading around $330 per 1,000 board feet.
Again, over the past few months, Louisiana-Pacific is experiencing softer demand in I-Joists and LVL facility, along with higher cost of sales. In the first nine months of 2018, unit shipments in LVL operations were down 3% from the prior-year period. The negative impact is expected to continue in the fourth quarter as well.
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