How To Play The Growing Housing Market
Summary
- Louisiana-Pacific has a dominant position in the North American home building market.
- The housing market is on the rise, giving Louisiana-Pacific room to grow.
- Louisiana-Pacific has seen growth in each of its main segments in the past 4 years.
Louisiana-Pacific Corp. (NYSE:NYSE:LPX) is in the business of manufacturing and selling homebuilding products for new homes and light industrial and commercial buildings, as well as repair and remodeling products. While most of their business is done in North America, they have a growing presence in South America as well.
LPX has a dominant presence in North America. They are the leading producer of Oriented Strand Board (OSB), which is an alternative to plywood that has quietly been taking over the market since 2001 because of its superior durability. In fact, OSB is now used for 70% of all floor, wall and roof sheathing in North America, and again, Louisiana Pacific is at the forefront of this trend. They are also the only producer of OSB in South America, and their South American portion of OSB sales only contributed 6% of their overall revenue. Currently, they have 2 OSB plants in Chile, with a third currently being built, as well as one in Brazil. This is an area where there is plenty of growth potential, being the only producer of a homebuilding staple in an entire continent. LPX is also the leading producer of wood siding in North America, and in 2016, OSB and wood siding contributed 46% and 34% of LPX’s total revenue, respectively.
A significant majority of housing data points to a market that has at least 3-4 years of growth ahead of it. One example that stands out is the high growth rate of new home sales in the USA since 2010.
At the end of June 2010, the total new homes sold was 267,000. This has been on a steady growth trajectory ever since, reaching 610,000 at the same time this year. That’s 128% growth in just 7 years, a clear sign of strong demand for new homes – Louisiana-Pacific’s main line of business. Not only has the homebuilding industry seen massive growth over the past 7 years, it seems as though this is just the beginning. The last time new home sales made an all-time high was in August of 2005, and there is still room for growth in the triple digits over the next 7-10 years as the housing market continues to rebound from the financial crisis.
Another positive sign for the housing market is the increase in building permits:
The amount of new building permits in June of 2009 was 520,000. Now 8 years later, the number is up to 1,168,000, about 125% higher, and that was after a 2-month decrease. This is a great sign for demand in the housing market, as an increase in building permits means that more new homes will be built and sold. The National Association of Home Builders forecasts another 17% of growth in the number of building permits through 2019, bringing the monthly total to 1,439.
The low interest rate environment has also helped in the growth process of the homebuilding market. With lower rates, people are more inclined to buy than rent, and the low interest rate trend is something that is projected to continue for the next 4-5 years. The Congressional Budget Office predicts that interest rates will remain less than 3% through 2021 (the current level is 1.25%). Although rates are expected to grow, they will still be low compared to the 6% level of 2000 and 5% level of 2006. And because this is such a gradual process, less than a 2% increase in 4 years, it gives plenty of people time to buy a home with attractive interest rates.
With interest rates projected to remain low for the next 4+ years and strong demand for new houses evident in the growth of building permits and new home sales, Louisiana-Pacific should have strong business growth in the years ahead. Not to mention that with the decreasing rate of unemployment and growth in the job market, they will have the capacity to meet that demand.
Although Louisiana-Pacific has had some volatile earnings over the past several years, I think they will remain in an overall uptrend for the next 5+ years. If the housing market continues to expand as expected and interest rates remain relatively low, they will have plenty of demand for building, remodeling, and renovating new homes and commercial properties. A large majority of their segments have had steady revenue growth over the past 5 calendar years (2012 through 2016). OSB (46% of revenue) has grown 6% per year, and siding (34%) and engineered wood products (13%) have grown by about 11% each. The remaining revenue is made in their South American segment, which has plenty of room to expand, as LPX is the only OSB provider in the continent. In addition to the growing segment revenue, Louisiana-Pacific has minimal debt to worry about. At the end of March 2017, they reported a total of $376.2 million in debt, compared to $649.5 million in cash. Many companies in the building and construction industry have that little debt to worry about, so it’s just one more thing that makes LPX attractive against its competitors.
Overall, I think that Louisiana-Pacific Corporation has several bright years ahead of it and is a great buy today considering their competitive position and the resurgence of the housing market.
This article was written by
Analyst’s Disclosure: I am/we are long LPX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (6)
leading in MWP,but not in OSB alone.aschmon got you on a technicality,but you are in the right stock......LPX is much more liquid and probably cheaper EPS although I didn't check..thanks for the article and have a good one !!
Your statement that OSB has taken share from plywood because its superior durability is also in error. The durability of OSB is at best comparable to that of plywood. The primary reason for its dominance is manufacturing cost - and therefore - price. Builders can save several hundred dollars per home using OSB for sheathing instead of plywood. I too enjoyed your article!