These are interesting times in the housing/building materials space.
I'd hardly call the recent data on housing starts exceptionally bullish,
but household formation has been improving and low interest rates
should be supportive for home buyers. At the same time, the producers of
oriented strand board (or OSB), engineered wood products, and other
wood-based building materials haven't exactly been paragons of
discipline. That has led to lower prices, and in some cases multiyear
lows for OSB in certain regions.
And yet, Louisiana-Pacific (NYSE:LPX)
is up about 25% over the past year. What constitutes a fair price for
LPX is certainly up for debate, but the shares ultimately reached a
point where they were trading at less than half the replacement value of
the assets and reflecting none of the potential upside to any recover
in housing and OSB pricing.
Whether LPX is trading at an
interesting price today has a great deal to do with your near-term
outlook for housing and your investment horizon. A true recovery
scenario should see EBITDA approach $500 million and that can support a
fair value in the low-to-mid $20's, but it's impossible to reach that
price on the basis of a long-term FCF model that captures both the
profitability of the good times and the negative free cash flow of the
bad times. As a trade on a better housing outlook (and by extension,
better wood products pricing), Louisiana-Pacific could still have room
to run, but this looks like more of a trade than an investment.
Click here for more:
Louisiana-Pacific Seems To Be Running Off The Bottom
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