Louisiana-Pacific Corporation’s (LPX - Free Report) efficient cost-reduction strategy, robust demand for products and the recent investment in Entekra bode well. Notably, the company’s shares have risen more than 14.5% so far this year compared with the industry’s rise of 9.6%. Meanwhile, estimates for the current quarter and year have moved up 17.9% and 12.2%, respectively, over the last 60 days, which reflects analysts’ optimism on the stock’s potential. Let’s delve deeper and find out whether the company can continue its bull run in the near term.
Efficient Cost-Reduction Strategy: Louisiana-Pacific continues to reduce the cost structure of facilities through the sale or shutdown of underperforming mills and manufacturing facilities. Also, the company makes lower investments in technology. It resorts to a strategy of curtailing production at select facilities to meet customer demand as well as optimize portfolio and margins. Income from operations improved 68.7% in the first quarter of 2018 and more than 150% in 2017.
Investment in Entekra: In May 2018, Louisiana-Pacific made an investment of $45 million in Entekra — a design, engineering and manufacturing company that provides off-site framing for residential and commercial construction. The investment is expected to position Louisiana-Pacific as a leading building solutions company.
Considering the critical shortage of skilled labor, efficient and innovative building techniques are required. Entekra’s off-site framing solutions will help boost market demand and productivity for builders. This will reduce waste and improve quality of the home construction process. The partnership is expected to combine Entekra’s established engineering and automated framing proficiency with Louisiana-Pacific’s market access to regional and national builders. Also, the partnership will help Louisiana-Pacific to leverage large-scale manufacturing capabilities and capital deployment necessary to boost the business.
Solid Housing Market: Louisiana-Pacific’s business primarily relies on North American new home construction as well as repair and remodeling. Demand for products is related to the performance of the broader housing market. Positives 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 and drive revenues.
Undervalued to Peers: Louisiana-Pacific has a Value Style Score of B, putting it into the top 40% of all stocks we cover from this perspective. The company currently has a trailing 12-months Price-to-Earnings (P/E) ratio of 11.4, while the industry’s average is at 23.1. Moreover, its forward P/E ratio (price compared to this year’s earnings) is lower at 10.2. This indicates that a slightly more value-oriented path may lie ahead for Louisiana-Pacific.
Looking at the company’s sales, the company currently trades at a Price-to-sales (P/S) ratio of 1.5, lower than the industry’s average of 3.6. Some prefer this metric more than other value-focused ones because sales are harder to manipulate with accounting tricks than earnings.
An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health of a business. Louisiana-Pacific has a P/CF of 8, lower than the industry’s average of 23.1.
All these ratios indicate that the company is undervalued compared with its industry peers. This coupled with rising earnings estimates, reinstates investors’ confidence in the stock.
Rising materials costs are growing concerns for Louisiana-Pacific. Wood fiber is the primary raw material used by the company and its primary source 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.
Along with wood fiber, the company uses a significant quantity of various resins in the manufacturing processes. Resin product costs are influenced by changes in the prices or availability of raw materials used to produce resins, primarily petroleum products as well as demand for and availability of resin products.
Also, the company has a high degree of product concentration in North America Oriented Strand Board (OSB). OSB accounted for about 54%, 51% and 47% of North American sales in 2017, 2016 and 2015, respectively. Louisiana-Pacific expects OSB sales to continue to account for a substantial portion of its revenues and profits in the future. Increased concentration around one segment makes the company susceptible to commodity pricing and price volatility.
Zacks Rank & Stocks to Consider
Louisiana-Pacific carries a Zacks Rank #3 (Hold).
You can consider a few better-ranked stocks in the same sector.
Century Communities, Inc (CCS - Free Report) sports a Zacks Rank #1(Strong Buy). Its earnings are expected to grow 47.1% in 2018. You can see the complete list of today’s Zacks #1 Rank stocks here.
M.D.C. Holdings, Inc (MDC - Free Report) , a Zack Rank #1 stock, is expected to witness 27.9% growth in earnings this year.
Meritage Corporation (MTH - Free Report) holds a Zack Rank #2 (Buy). Its earnings are expected to grow 38.7% in 2018.
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