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Here's Why You Should Stay Away From Louisiana-Pacific Now

Zacks Equity Research

The overall wood industry has been plagued with lower demand, and higher material costs and expenses. Louisiana-Pacific Corporation LPX is also bearing the brunt of these headwinds.

Despite undertaking various strategic initiatives like business transformation, acquisitions and cost-reduction plans, the company’s performance has been negatively impacted by the above-mentioned factors. Also, weakness in Engineered Wood Products (“EWP”) and Oriented Strand Board (“OSB”) businesses are adding to its worries.

The company — which shares space with Weyerhaeuser Company WY, Universal Forest Products, Inc. UFPI and Norbord Inc. OSB in the Zacks Building Products - Wood industry — has underperformed the industry so far this year. Estimates for fourth quarter and 2019 are trending downward over the past seven days, depicting analysts' concern over the company’s earnings growth potential.

Let’s delve deeper and try to assess what’s taking this Zacks Rank #4 (Sell) company down the hill.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lackluster Performance: In the trailing four quarters, Louisiana-Pacific’s earnings and revenues missed the Zacks Consensus Estimate. Recently, the company reported weaker-than-expected third-quarter 2019 results. The top and bottom lines lagged the Zacks Consensus Estimate by 0.2% and 55.6%, and declined 18.2% and 90.4% year over year, respectively. Lower OSB prices (down 35%) and volumes (down 14%) negatively impacted its performance.

Also, gross profit and adjusted EBITDA from continuing operations deteriorated significantly from the year-ago period. Notably, adjusted EBITDA margin contracted to 8.1% from 26.2% a year ago. The decline was mainly caused by increased raw material costs, lower volumes in EWP and the Dawson Creek mill conversion.

Higher Costs & Expenses: Louisiana-Pacific has been witnessing higher raw material costs, primarily for wood fiber and resins. Volatility in governmental, economic or industry conditions influences its wood fiber prices. Resin product costs are influenced by changes in the price and availability of raw materials that are used to produce resins like petroleum. Tariff-related concerns are adding to the woes.

Additionally, increased marketing investments associated with accelerating repair and remodel channel penetration, along with new product introductions have been denting its performance over the last few quarters.

Lower OSB Pricing & Volume: Louisiana-Pacific has a high degree of product concentration around OSB. Currently, it accounts for nearly 33% of total revenues. Notably, the highly concentrated nature of business makes it susceptible to price volatility.

Since 2018, the company has been experiencing pricing pressure in the OSB segment. In the first nine months of 2019, its adjusted earnings declined more than 90% from the year-ago level due to lower OSB pricing across North American operations, and higher costs and expenses. The segment's adjusted EBITDA was negative $1 million against $123 million reported a year ago.

Decline in EWP Segment Sales Poses Risk: Softer demand in all product lines due to market weakness is a risk for Louisiana-Pacific’s prospects. EWP sales declined 4.5% year over year in the third quarter due to lower demand and a decline in selling prices on increased pricing pressure. Also, adjusted EBITDA fell 40% in the quarter.

Volatile Market: Demand for the company’s products has a strongly dependency on the housing industry. New home construction activity in North America is highly cyclical in nature. The housing industry is affected by consumer confidence levels, prevailing economic conditions and interest rates. The federal government’s actions relating to economic stimulus, taxation and borrowing limits can affect consumer confidence and spending levels, which in turn can hurt the economy and housing market.

Total housing starts in the first nine months of 2019 were down from the corresponding period of 2018, with single-family starts declining 1.6%. The company believes that nearly 40% of SmartSide revenues are based on single-family housing. Given slower housing starts, the company now expects SmartSide Strand revenue growth of 10% in 2019 and 10-12% in the long term compared with 12-14% expected earlier.

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Louisiana-Pacific Corporation (LPX) : Free Stock Analysis Report
Universal Forest Products, Inc. (UFPI) : Free Stock Analysis Report
Norbord Inc. (OSB) : Free Stock Analysis Report
Weyerhaeuser Company (WY) : Free Stock Analysis Report
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