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Can Louisiana-Pacific's Siding Business Combat Cost Woes?

Zacks Equity Research
Here we take a peek into five construction stocks that have growth potential amid the ongoing industry headwinds.

Solid Siding business, strategic investments in partnerships and joint ventures, and business transformation plan are aiding Louisiana-Pacific Corporation LPX to drive growth.

However, rising materials costs, higher expenses associated with repair and remodeling activity, and product introduction, and weak Engineered Wood Products (“EWP”) mar its prospects. Meanwhile, the company’s earnings missed the Zacks Consensus Estimate in two of the trailing four quarters, with the average negative surprise being 2.7%.

Let’s delve deeper into factors that are influencing the overall performance of 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.

Key Growth Drivers

Louisiana-Pacific gains from solid Siding business, which accounted for 33.3% of the total revenues in 2018. The company has been making efforts to increase the penetration of Siding products in repair/remodel and roll out SmartSide products. In 2018, the company recorded 12% revenue growth from SmartSide strand products, with volumes up nearly 8% and price realizations increasing 5% from a year ago. The company expects Siding revenues to grow 12-14% in the long term and nearly 12% in 2019. Also, the company targets an EBITDA margin of at least 20% for the overall Siding business in 2019.

Moreover, Louisiana-Pacific keeps on investing in joint ventures and partnerships with different businesses in order to leverage large-scale manufacturing capabilities and scale the business. On Sep 30, 2018, the company entered into a joint venture with Resolute Forest Products. Louisiana-Pacific is an exclusive distributor of I-joists and the partnership will jointly operate I-Joist facilities in Quebec.

It made an investment of $45 million in Entekra — a design, engineering and manufacturing company that provides off-site framing for residential and commercial construction — in May 2018. Entekra’s off-site framing solutions will help boost market demand and productivity for builders, thereby reducing waste and improving the quality of the home construction process.

Louisiana-Pacific is gradually improving business by growing the Siding segment and simultaneously reducing costs across businesses. To that end, it remains focused on specifically three areas. Firstly, it is increasing the efficiency of mills by improving productivity, run time and quality through Overall Equipment Effectiveness (OEE) initiatives. Secondly, the company is applying best practices to its supply chain, including procurement, logistics and working capital across $1.1 billion of addressable spend. Lastly, it is optimizing infrastructure costs. The company also introduced Lean Six Sigma to the facilities under which it is selling or shutting down underperforming mills and manufacturing facilities, and investing in technology.

Factors Affecting Profitability

Louisiana-Pacific is witnessing significantly higher raw material costs, primarily wood fiber and resins. Gross margin in 2018 was impacted by increased raw material costs and downtime at its SmartSide Fiber and CanExel facilities, and the Dawson Creek mill conversion.

Meanwhile, higher expenses associated with repair and remodel channel penetration and product introduction have been denting its bottom line. Adjusted earnings of 19 cents per share in the fourth quarter of 2018 declined 73.2% from the year-ago level. The results were impacted by increased marketing investments associated with accelerating repair and remodel channel penetration, and new product introductions. Rising material and transportation costs also added to the woes.

In 2018, EWP sales declined 6.8% year over year. Particularly, in the fourth quarter of 2018, sales declined 17%, as the quarter was impacted by slow demand in I-Joists and LVL facility, owing to weakened housing starts.

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