Louisiana-Pacific Boosted By A Buyback And May Be Past The Worst

Cyclical commodity companies are never easy to model or analyze, and Louisiana-Pacific (LPX) (or “LP”) is really no exception. Oriented strand board (or OSB) prices have stabilized recently, but at much lower levels than a year ago, but competition seems to ramping up in specialty siding and you can never really be too confident that the company’s smaller rivals will remain disciplined on pricing and capex. On top of all that, you have the uncertainties that go with modeling the residential construction market.

LP has done pretty well since my last write-up, rising more than 15% and outperforming not only the S&P 500, but also competitors like Weyerhaeuser (WY) and Norbord (OSB), with investors liking what they heard in mid-February regarding an accelerated buyback plan. At this point, I no longer see LP as undervalued and further upside seems tied much more to the health of the residential construction market.

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Louisiana-Pacific Boosted By A Buyback And May Be Past The Worst

Revisiting Louisiana-Pacific After A Sharp Correction In OSB Prices

I’d previously written in reference to Louisiana-Pacific (LPX) that I regarded a decline in OSB pricing as a “when, not if” scenario, but I can’t say I was expecting the price to fall roughly 60% from its peak in only about six months. Between new capacity coming online and disappointing momentum in residential construction, though, the operating outlook has deteriorated sharply and taken the share price of LP, Weyerhaeuser (WY), and Norbord (OSB) with it.

Prices went too high in the good times and I believe they’ve overcorrected, but there are a lot of moving parts to the Louisiana-Pacific story, and volatility is likely to remain above-average. I believe the shares are trading too cheaply now on the basis of “full cycle” EBITDA and long-term discounted cash flow, and I believe the market is undervaluing the long-term potential of the siding business, but the undervaluation I see here comes with the asterisk that near-term conditions (and the share price) could still get worse before they get better.

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Revisiting Louisiana-Pacific After A Sharp Correction In OSB Prices

Louisiana-Pacific Making The Best Of The Cycle

When I last wrote about Louisiana-Pacific (NYSE:LPX) (or “LP”) back in October of 2016, I thought the shares still had upside on the basis of ongoing price/margin leverage in OSB, continued growth in housing, and the growth of the company’s siding business. The shares are up about 50% since then, outperforming most of its peers like Norbord (NYSE:OSB), James Hardie (NYSE:JHX), and Weyerhauser (NYSE:WY) over that time (Ply Gem (NYSE:PGEM) has nearly matched LP, while Boise Cascade (NYSE:BCC) has outperformed), as OSB pricing has exceeded expectations on uncommonly responsible competitor behavior and as the company has executed well on its operating improvements and siding growth plans.

It’s harder to see as much upside now. While OSB pricing has held up, and likely will remain above $300 despite oncoming capacity growth, and siding continues to have strong growth potential, I believe a lot of that is in the share price. I don’t think LP shares are overvalued on the basis of cycle-average EBITDA, but I do believe that 2018 could be the near-term peak and the returns could look more “market-like” from this point.

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Louisiana-Pacific Making The Best Of The Cycle