A Contrarian Play On Housing

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About: Louisiana-Pacific Corporation (LPX)
by: Ron Sommer
Summary

OSB Price Rally.

Continued Growth in Siding.

Significant Price Appreciation Potential.

The Louisiana-Pacific Corporation ( LPX) offers an interesting play on the housing industry. The company is a manufacturer of building products used primarily in new house construction, remodeling and renovation. The siding segment will lift LPX to much higher share price levels.

Housing starts in the US increased 1.5 percent from a month earlier to an annualized rate of 1,228 thousand in October of 2018, following an upwardly revised 5.5 percent drop in September and compared with market expectations of a 1.6 percent rise. The multi-family segment led the rise while construction of single-family houses declined for a second month. Starts rebounded in the South after being hurt by Hurricane Florence in September but fell in the Northeast and the West.

Sales are growing at a rate that greatly exceeds the growth rate of new housing starts. Year-over-year sales grew at the rate of 14.6% to $2,949.5 million. Sales for fiscal year 2017 were $2,733.9 million. The analysts at Reuters estimate FY18 sales in the $2,846.07 million to $2,932.00 million range and for FY19 the range is $2,672.04 to $3,073.00 range.

The risks here center around a fall in oriented strand board prices. OSB is a notoriously volatile commodity, largely a product of high-fixed manufacturing costs and a volatile end market. Any slowdown on new home construction would put pressure on the OSB market.

On the other hand, siding is a rapidly growing segment. LPX currently has ~85% market share of engineered wood siding which is currently 8% of the overall siding market. This segment is growing approximately 10%-15% annually. LPX has a target market of $6 billion to $7 billion which breaks down to ~45% remodeling and renovation, 35% new construction, and 20% non-residential construction.

The three prior fiscal year sales by segment table gives a good idea of the growth potential from the siding segment.

Year ended December 31,

Dollar amounts in millions

2017

2016

2015

SALES BY BUSINESS SEGMENT

Siding

$

$884.0

$

752.3

$

636.4

OSB

1,302.5

1,027.7

807.5

Engineered Wood Products

365.9

296.9

286.1

South America

155.3

136.9

134.9

Other products

30.0

26.9

29.0

Intersegment Sales

(3.8

)

(7.3

)

(1.4

)

Total sales

$

2,733.9

$

2,233.4

$

1,892.5

Over the years, engineered wood, and fiber cement siding have gained significant share from vinyl and traditional wood siding. Engineered wood and fiber cement offer a very competitive value proposition to vinyl with a superior appearance and easier upkeep at a small cost premium.

Over the years, net income has been very volatile. In 2011, the company reported a net loss of $181.3 million. In the next several years net income seesawed between loss and profitability. However, since 2016, net income has grown at a vigorous pace. The three-year net income growth rate is 92.8% and 66.8% year-over-year.

Earnings per share from continuing operations has gown 90.9% over the last three fiscal years and 65.5% year-over-year. Reuters projects FY18 earnings per share in the $2.80-$2.94 range and FY19 earnings as $1.41 to $3.24. Clearly, there is little consensus on future earnings.

The company started to pay a dividend that currently yields 2.3% and it has a share buyback program that yields another 1.4%.

The catalysts for LPX are stabilized OSP prices and continued growth in the siding segment. The valuation ratios for the company are all very modest reflecting the perception that sales and earnings will stall.

Company Industry Sector

P/E Ratio (TTM) 6.72 29.85 32.15

P/E High - Last 5 Yrs. 18.30 61.69 132.14

P/E Low - Last 5 Yrs. 10.32 9.91 14.54

Price to Sales (TTM) 1.09 1.86 65.48

Price to Book (MRQ) 1.78 2.41 8.73

Price to Tangible Book (MRQ) 1.86 4.66 NM

Price to Cash Flow (TTM) 5.15 23.10 18.86

Barron’s Magazine reports analyst stock price targets ranging from $18.00 to $36.00. The company has rising returns on invested capital which also exceed industry norms. EBIT to Enterprise Value is a hefty 25.57x and the free cash flow yield is 10.01%. By my estimates, in 2-3 years, LPX should be trading in the $43-$45 range.

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.