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Solid Demand, Pricing Strategy Bode Well for Louisiana-Pacific

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Solid Demand, Pricing Strategy Bode Well for Louisiana-Pacific

Robust demand for its products, courtesy of housing market strength, has been a major growth driver for Louisiana-Pacific (LPX).

Strong housing market, bold pricing strategy along with efficient cost-saving plans have been conducive to Louisiana-Pacific Corporation’s LPX impressive top and bottom-line growth. However, rising materials costs remain a concern.

A Look at Second-Quarter 2018 Results

Louisiana-Pacific, a leading manufacturer of engineered wood building materials, structural framing products as well as exterior siding for use in residential, industrial and light commercial construction, posted second-quarter 2018 results, wherein earnings and revenues beat the Zacks Consensus Estimate.

The company reported adjusted earnings per share of $1.08 in the quarter, reflecting a considerable increase from the year-ago figure of 58 cents. Net sales of $810.8 million in the quarter increased 16.8% year over year. The upside can be attributed to strong operational execution across the business, higher oriented strand board (OSB) pricing as well as ongoing growth in its value-added products.

In fact, the reported quarter marked the company’s best second quarter since 2004. Each business — Siding, OSB, Engineered Wood and South America operations — reported higher earnings and revenues year over year.

Adjusted EBITDA from continuing operations was also up 44.9% in the second quarter.

Key Growth Drivers

Louisiana-Pacific’s business primarily relies on North American new home construction, as well as repair and remodeling. Demand for its products is related to the performance of the broader housing market. Positive factors like an improving economy, modest wage growth, low unemployment levels and solid consumer confidence raise optimism about the housing sector’s performance. As such, demand for Louisiana-Pacific’s products is likely to increase, thereby driving revenues.

Apart from solid U.S. housing momentum, robust pricing and demand across the company’s Siding and LP South America will continue boosting growth. On the second-quarter 2018 conference call, the company stressed on solid pricing strategy that is likely to remain high across all its market segments. Louisiana-Pacific is also on track to come up with 12-14% revenue growth for Smart Side Strand. Further, the company experienced strong pricing in the LP South America market during the second quarter. The company anticipates the momentum to sustain in the third quarter as well.

Meanwhile, Louisiana-Pacific follows a systematic cost-saving initiative in a bid to lower cost. The company continued to lower the cost structure of its facilities through Lean Six Sigma efforts, the sale or shutdown of underperforming mills and manufacturing facilities, as well as investments in technology. The Lean Six Sigma efforts continue to produce excellent returns from cost-saving and efficiency projects. The company resorts to a strategy of curtailing production at selected facilities to meet customer demand and optimize portfolio, as well as margins.

The Zacks Rank #1 (Strong Buy) company’s shares have outperformed its industry year to date. While the company’s shares have gained 9.2%, its industry has declined 0.9% in the said period. Earnings estimates for 2018 and 2019 have increased 0.3% and 4.1%, respectively, over the past 30 days, reflecting analysts’ optimism regarding the company’s future earnings growth. You can see the complete list of today’s Zacks #1 Rank stocks here.



Headwinds

Rising materials costs are growing concerns for Louisiana-Pacific. Wood fiber is the primary raw material used by the company and the primary source of wood fiber is timber. The cost of different varieties of wood fiber is subject to volatility owing to governmental, economic or industry conditions. The recent imposition of tariff on imported lumber raises concern.

In addition to wood fiber, the company uses a significant quantity of various resins in the manufacturing processes. Resin product costs are influenced by price changes or availability of raw materials used to produce resins, primarily petroleum products, as well as demand for and availability of resin products.

Notably, demand for its products has a strong relationship with the level of new home construction activity in North America, which has been historically characterized by significant cyclicality. To this end, rising interest and mortgage rates, as well as land and labor shortages raise concerns, as do rising material prices.

Other Stocks to Consider

Other top-ranked stocks in the industry include Trex Company, Inc. TREX, Norbord Inc. OSB and PotlatchDeltic Corporation PCH, each sporting a Zacks Rank #1.

Trex, Norbord and PotlatchDeltic’s 2018 earnings are expected to grow 43%, 22.5% and 16.5%, respectively.

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