Louisiana-Pacific Corporation ( LPX Quick Quote LPX - Free Report) or LP’s efforts to increase penetration of Siding products in repair/remodeling and the rollout of SmartSide products are commendable. Its strategic business transformation efforts, effective cash management and inorganic moves are added positives. However, softness in single-family residential construction, along with supply chain woes and inflationary pressure, primarily for material and labor, are concerns. In the past six months, the company’s shares have gained 2.8% compared with the Zacks Building Products – Wood industry’s 11.7% growth. Earnings estimates for 2023 have decreased to $2.99 per share from $3.20 in the past 30 days. Image Source: Zacks Investment Research
Let’s discuss the factors substantiating its Zacks Rank #3 (Hold).
Growth Drivers Solid Siding Business: LP has been increasing the penetration of Siding products in repair/remodeling and rolling out SmartSide products. Siding is less sensitive to new housing market cyclicality as more than 50% of Siding Solutions’ demand comes from other markets like sheds and repair and remodeling. The company believes that long-term market trends and demographics indicate continued growth in demand for sustainable engineered wood siding in these markets. The company has been witnessing higher-than-expected demand for Smooth SmartSide and ExpertFinish. It also exited the fiber product line to focus on higher-margin SmartSide strand products. Under the unit, the ExpertFinish product witnessed 8% volume growth in the third quarter of 2023, the same as the prior-year quarter. The company opened a new ExpertFinish facility in Bath, NY, in the third quarter of 2023. This new facility will shed light on increased automation and improved efficiency in LP's prefinished siding production. Strategic Initiatives: LP is gradually transforming from a commodity producer to a more stable, cash-generative business by increasing revenues and EBITDA mix. On that note, it has been increasing the efficiency of its 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. LP achieved $1.2 billion growth in adjusted EBITDA from 2019 to 2022. Louisiana-Pacific’s business banks on acquisitions, business combinations and divestitures of low-profitable businesses. LP inked a deal with Forex to acquire the Wawa OSB mill. Post-completion, Wawa will become LP’s largest single-line siding mill, adding nearly 400 million square feet of capacity. This will bring the total siding capacity to about 2.7 billion square feet. LP believes this deal will generate solid returns in the future. Impressive Shareholders’ Return: Louisiana-Pacific has been consistently enhancing shareholders’ returns through share repurchases and dividends. In the first nine months of 2023, the company paid $52 million in cash dividends and repurchased common stocks for a total value of $900 million. On Feb 17, 2023, it hiked quarterly cash dividends by 9% to 24 cents per share. The company had committed to its shareholders to return at least 50% of the cash flow from operations in excess of capital expenditures to sustain its core business as well as grow Siding and value-added OSB over time. Hurdles to Cross Higher Costs & Expenses: Increased marketing investments associated with accelerating repair and remodel channel penetration, along with new product introductions, have been putting pressure on the company’s performance over the last few quarters. For the first nine months of 2023, earnings plunged by 5.8% from the year-ago quarter. Adjusted EBITDA of $349 million was down significantly from the $1,289 million reported in the prior year, primarily due to lower volumes, increased discretionary investments to support future growth (including siding mill conversions and sales and marketing costs) and press rebuild costs. Housing Market Risks: Demand for the company’s products has a solid 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. Inflationary Pressure: Louisiana-Pacific and other Wood industry players have been witnessing significant supply chain woes and inflationary pressure, primarily for material and labor. The cost of different varieties of wood fiber is volatile owing to governmental, economic or industry conditions. Key Picks
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