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Louisiana-Pacific (LPX) Up 179% Over a Year: What's Driving it?

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Louisiana-Pacific Corporation’s LPX shares have gained 178.7% over the past year, outperforming the Zacks Building Products – Wood industry and broader Construction sector’s rally of 110.7% and 86.2%, respectively. The performance was mainly driven by solid operational efficiency, cost-containment efforts and resilient housing market prospects.

Furthermore, the stock still has upside potential left, as is evident from the recent earnings estimate revision trend. Earnings estimates for the first quarter and full-year 2021 have moved up 15.1% and 39.3%, respectively, over the past 30 days. This trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #1 (Strong Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

Major Growth Drivers

Improved Housing Market and R&R Activities: Declining mortgage rates have been driving the U.S. residential market of late. Also, with more work-from-home and stay-at-home orders amid the pandemic, the demand for repair and remodeling activities has increased many folds over the last few quarters. Greater-than-expected demand for home improvement products has been benefiting the company. This has been a boon for Louisiana-Pacific and other companies like UFP Industries UFPI, Potlatch Corporation PCH and Weyerhaeuser Company WY in the same industry. UFP Industries, Potlatch and Weyerhaeuser currently sport a Zacks Rank #1.

Solid Prospects: Louisiana-Pacific is gradually transforming from a commodity producer to a more stable cash-generative business by increasing revenues and EBITDA mix. The company remains focused on improving the business by growing the Siding unit and simultaneously reducing cost. It has been mainly focusing on three areas - increasing the efficiency of mills by improving productivity, run time and quality through overall equipment effectiveness initiatives; applying best practices to its supply chain; along with optimizing infrastructure costs.

It has solid prospects, as is evident from the expected earnings growth rate for 2021, which is pegged at 48%.

Enhancing Shareholder Returns: Louisiana-Pacific has been consistently increasing shareholders’ return through share repurchases and dividends. In 2020, the company paid $65 million worth of dividends and $200 million to repurchase stocks. Also, during the fourth quarter of 2020, it announced a 10% increase in annual cash dividends to 64 cents per share. As of now, it is committed to enhance shareholders’ value through dividend payments. In the meantime, with a net cash position balance sheet and record high OSB pricing, the company is ramping up share repurchases ($171 million was bought back in the fourth quarter and $70 million in October).

The company has committed to return to shareholders at least 50% of cash flow from operations, in excess of capital expenditures, in order to sustain core business, and grow Siding and value-added OSB.

Higher ROE: Louisiana-Pacific’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 44.2% compares favorably with the industry average of 17.9%, implying that it is efficient in using shareholders’ funds.

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