Wednesday, May 20, 2015

Seeking Alpha: Louisiana-Pacific Seems To Be Running Off The Bottom

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.

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Louisiana-Pacific Seems To Be Running Off The Bottom

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