Strategic Moves Aid Louisiana-Pacific (LPX), Inflation Hurt
Louisiana-Pacific Corporation LPX or LP’s shares have outperformed the Zacks Building Products – Wood industry in the past three months. The stock has been gaining from the strong U.S. residential market and repair and remodeling (R&R) business. Also, strategic business transformation, effective cash management and inorganic moves are added positives.
However, intense inflationary pressure, persistent supply chain woes and project delays are affecting the company.
Let’s discuss the factors influencing the performance of this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Major Growth Drivers
Strategic Business Translation: LP is gradually transforming from a commodity producer to a more stable cash-generative business by increasing revenues and EBITDA mix. 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; and optimizing infrastructure costs.
The company remains focused on improving business by growing the Siding unit and simultaneously reducing costs. In the past three years, EBITDA for the Siding segment has doubled with a CAGR of 25%.
Image Source: Zacks Investment Research
Cost-Containment Efforts: Louisiana-Pacific is well-positioned for segmental growth despite a challenging 2020 and 2021. To reduce costs, Louisiana-Pacific lowered the cost structure of its facilities through Lean Six Sigma efforts, the sale or shutdown of underperforming mills and manufacturing facilities and investments in technology.
It resorts to a strategy of curtailing production at selected facilities to meet customer demand and optimize portfolio and margins. In 2021, SG&A expenses — as a percentage of net sales — improved 130 basis points on a year-over-year basis, attributable to persistent cost-effective techniques implemented by the company.
Solid Inorganic Moves: Louisiana-Pacific’s business banks on acquisitions, business combinations and divestitures of low-profitable businesses. In sync with the strategy, the company confirmed capacity expansion projects at Houlton and the restart of the Peace Valley mill in first-quarter 2021.
During first-quarter 2022, it announced that Houlton started SmartSide production in March and is shipping A-grade SmartSide. Also, it intends to accelerate the Sagola conversion and start SmartSide production by the end of first-quarter 2023.
Recently, it inked a deal with Pacific Woodtech to divest its Engineered Wood Products (EWP) business for $210 million. Per the deal, LP will divest its laminated veneer lumber and I-joist manufacturing facilities in Wilmington, NC, Red Bluff, CA, and Golden, British Columbia, Canada, associated timber license assets and the SolidStart brand.
Impressive Shareholders’ Return: LP has been consistently enhancing shareholders’ return through share repurchases and dividends. In first-quarter 2022, it paid $19 million worth of dividends and $104 million to repurchase stocks. LPX is committed to returning shareholders at least 50% of cash flow from operations in excess of capital expenditures to sustain core business and grow Siding and value-added OSB.
Hurdles to Cross
Inflationary Headwinds: Louisiana-Pacific is witnessing significant supply chain woes and inflationary pressure, primarily for material and labor. Wood fiber is the primary raw material used by Louisiana-Pacific, which is volatile in nature. Also, lumber products — one of the major components — are dependent on various macroeconomic factors. The lumber market is highly volatile and the market swings have negatively impacted various operations primarily focused on variable price products.
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.
Earnings estimates for 2022 have also moved down 14.2% in the past 30 days, indicating 6.4% year-over-year growth.
Dependence on Housing Market: Demand for the company’s products has a strong relationship to the level of new home construction activity in North America, which historically has been characterized by significant cyclicality. The housing industry is cyclical and is affected by consumer confidence levels, prevailing economic conditions and interest rates. Any untoward situation influencing the construction and housing sectors will impact the company's financials.
The federal government’s actions related to economic stimulus, taxation and borrowing limits can affect consumer confidence and spending levels, which in turn can hurt the economy and the housing market.
Key Picks
Masonite International Corp. DOOR is a leading manufacturer of doors across the world, with a significant market share in both interior and exterior door products. This Zacks Rank #1 stock has been banking on robust demand in residential end markets and solid project execution.
The Zacks Consensus Estimate for DOOR’s 2022 earnings has moved up to $10.11 per share from $9.70 in the past 60 days.
Boise, ID-based Boise Cascade Co. BCC — which currently carries a Zacks Rank #2 — is aided by favorable commodity wood products, pricing and robust construction activity.
BCC’s earnings estimate for second quarter has moved north to $4.68 per share from $4.60 in the past seven days.
Jacksonville, FL-based Rayonier Inc. RYN is well-positioned to capitalize on robust domestic demand trends, with a solid portfolio of timberlands in some of the most productive timber-growing regions of the Southern United States, Pacific Northwest and New Zealand.
This will help the company improve the export market conditions and create a favorable pricing environment. RYN is also focused on adding high-quality timberlands to its portfolio through acquisitions.
The consensus estimate for this Zacks Rank #2 player’s 2022 earnings has witnessed an upward revision from 61 cents per share to 65 cents in the past 60 days.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
LouisianaPacific Corporation (LPX) : Free Stock Analysis Report
Rayonier Inc. (RYN) : Free Stock Analysis Report
Boise Cascade, L.L.C. (BCC) : Free Stock Analysis Report
Masonite International Corporation (DOOR) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
