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Louisiana-Pacific (LPX) Banks on Siding Business, Costs High

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Louisiana-Pacific Corporation LPX — also known as LP — has been riding high on solid U.S. residential market, and robust repair and remodeling (R&R) activities. Also, strength in Siding business, rising Oriented Strand Board or OSB prices, solid business transformation plan and operational efficiency bode well.

Shares of LP have gained 60% so far this year, broadly outperforming the Zacks Building Products – Wood industry’s 20.8% rally. Earnings estimates for third-quarter 2021 have moved up 0.8% over the past seven days. This trend signifies bullish analyst sentiments. The company has a solid earnings surprise history, having surpassed the Zacks Consensus Estimate in the trailing six quarters. Its impressive VGM Score of A, supported by Value and Growth Score of A, is a testimony to the fact.

Yet, increase in raw material prices, freight and labor costs as well as mill spending are concerns for this Zacks Rank #3 (Hold) company. Also, higher expenses associated with repair and remodeling activity along with product introduction to drive the siding business raise concerns.

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Let’s delve deeper into the factors influencing the performance of LP, which shares space with Weyerhaeuser Company WY, Universal Forest Products, Inc. UFPI and Trex Company, Inc. TREX in the same industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Key Strategies to Drive Growth

Louisiana-Pacific is highly focused on improving the siding unit to increase the penetration of siding products in R&R activities. Over the past several quarters, LP has been experiencing solid demand for its products.

The Siding unit, which is no longer producing OSB, saw 33% revenue growth in first-half 2021. In fact, Siding Solutions (formerly known as SmartSide) revenues grew 43% year over year for the same period. The increase was mainly attributed to robust demand for its products. It intends to continue increasing investment in selling and marketing of the said business in 2021 and beyond.

LP is gradually transforming from a commodity producer to a more stable cash-generative business by increasing revenues and EBITDA mix. The company achieved $178 million in cumulative EBITDA from growth and efficiency since January 2019 till 2020. During the first half of 2021, adjusted EBITDA increased by $965 million to $1.1 billion, primarily due to growth in Siding Solutions revenues and higher OSB prices. It has been mainly focusing on three areas - increasing the efficiency of mills by improving productivity, run time and quality through overall equipment effectiveness or OEE initiatives; applying best practices to the supply chain; as well as optimizing infrastructure costs.

Apart from the transformation strategy, LP’s business banks on acquisitions, business combinations and divesture of low-profitable businesses. The company recently confirmed capacity expansion projects at Houlton and restarting of the Peace Valley mill. It expects to start SmartSide production at Houlton in late first-quarter 2022. Meanwhile, the company continues to accelerate the Sagola conversion and intends to start SmartSide production therein in first-quarter 2023.

Additionally, resilient housing markets and robust repair/remodel activity have been driving the demand for residential construction and thereby wood products. During the first and second quarters of 2021, the company witnessed strong demand for all of LP's products, including SmartSide and OSB, primarily driven by ongoing momentum in homebuilding, repair and remodeling activities.

Factors Denting Profitability

Higher costs and expenses have been a concern for all wood industry players. The cost of different varieties of wood fiber is subject to volatility owing to governmental, economic or industry conditions. Also, the imposition of tariff on imported lumber and other raw materials raises a concern.

During first-half 2021, the company witnessed higher freight and transport costs along with rising input costs. Although EBITDA rose strongly in all the segments, they witnessed inflationary pressure throughout the quarter. Further, a significant increase in lumber prices is likely to inflate costs of I-Joist and LVL, which may further put pressure on margin.

Along with wood fiber and lumber, shortages of resin and adhesives along with supply chain challenges are likely to persist. These apart, increased marketing investments associated with accelerating repair and remodel channel penetration along with new product introductions have been putting pressure on its performance over the last few quarters.


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