Weyerhaeuser Should Be On More Stable Footing Now

Weyerhaeuser (NYSE:WY) has done okay since my last update on this timberland and wood products company, but I still believe the share price doesn't reflect the full value of the company's assets and operations. The company is still vulnerable to weakness in the U.S. housing market, and I'm not thrilled about the long-term outlook for lumber, but I think the shares may be past the nadir for sentiment unless housing really struggles from here.

2019 won't be a banner year for EBITDA or cash flow, but I don't think the company needs to revise the dividend, and there are some further strategic moves the company may want to consider. With fair value in the $30s, I think there are still sound arguments for owning these shares, though they're probably not well suited to impatient investors.

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Weyerhaeuser Should Be On More Stable Footing Now

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

Between Plunging Prices, Chronic Oversupply, And Trade Tensions, Weyerhaeuser Has Had A Tough Time

The last year, and the last six months in particular, have been rough ones for Weyerhaeuser (WY) and other companies in the timber, lumber, OSB, and wood products space like Louisiana-Pacific (LPX), Norbord (OSB), Boise Cascade (BCC), and Canfor (OTCPK:CFPZF). Although I’d always expected lumber and OSB prices to correct down from above-trend levels, I didn’t expect the steep (approximately 60%) plunge in lumber and OSB prices over the past six months, nor the apparent topping out of housing starts below 1.5M. Add in trade and tariff issues with China and Canada, and the situation has gotten quite tough quite quickly.

As a company, Weyerhaeuser will be fine. The now-former CEO did a very good job of driving operational efficiency and I believe ongoing operational improvements are becoming a core part of the company’s culture. I also believe Weyerhaeuser’s high-quality timberlands will remain a solid store of value that can support healthy tax-advantaged dividend payments into the future. It will take time for the pricing pressures to work themselves out, but with the yield now over 6%, patient investors may want to start taking a look at this name.

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Between Plunging Prices, Chronic Oversupply, And Trade Tensions, Weyerhaeuser Has Had A Tough Time

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

Is The Market Missing The Forest For The Trees At Weyerhaeuser?

Residential construction is healthy and the prices of building supplies like sawlogs, timber, and OSB are very healthy… and yet, Louisiana-Pacific (LPX) and Weyerhaeuser (WY) have had lousy runs in the stock market this year and over the last twelve months. While Canadian companies like Canfor (OTCPK:CFPZF) (CFP.TO), Norbord (OSB), and West Fraser (OTCPK:WFTBF) (WFT.TO) have all enjoyed good runs, Weyerhaeuser shares have gone nowhere fast.

Lagging price realizations in OSB and still-lagging recoveries in Southern sawlogs are issues, and perhaps Weyerhaeuser is lagging because it’s not the “pure play” on some of these hot assets that other names are, but I find it interesting that the stock hasn’t responded more enthusiastically to the spiking prices in many of its end-markets.

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Is The Market Missing The Forest For The Trees At Weyerhaeuser?

OSB Prices Booming, But Louisiana-Pacific Shares Aren't Following

I thought Louisiana-Pacific (LPX) (or “LP”) shares were trading more or less near fair value when I wrote on the company earlier this year, and the shares have risen about 5% since then - slightly better than the iShares US Home Construction ETF (ITB), but lagging both Weyerhaeuser (WY) and Nordbord (OSB) over that time. The price of LP’s primary product, oriented strand board (or OSB) has continued to shoot higher amid healthy residential construction and restrained capacity/supply additions, though, and LP still has meaningful leverage to higher prices.

Residential construction is probably the most powerful potential driver at this point, as activity is trending a little higher than LP’s base-case assumptions. Although I do believe higher prices will eventually bring more supply into the market, I won’t dismiss the upside potential of a “stronger for longer” cycle. Still, LP operates in a cyclical business and I’d be careful about making big bets on “it’s different this time”.

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OSB Prices Booming, But Louisiana-Pacific Shares Aren't Following

Weyerhaeuser's Improved Execution Should Pay Dividends

For me, Weyerhaeuser (NYSE:WY) is an example of why valuation always matters. Generally well-valued (if not richly-valued) for its high-quality timberlands and wood products operations, Weyerhaeuser has lagged the S&P 500 for total returns for quite some time. Even when you account for the tax benefits of its REIT status and the housing slump, I would argue that shareholders have had to pay a price for Weyerhaeuser’s often-rich valuations, as well as several strategic missteps in the past.

I believe that Weyerhaeuser is now a better-run company and I do see some upside in the shares now. The Wood Products segment may be nearing its peak, but I expect healthy ongoing contributions from the Timberlands segment, and I believe Weyerhaeuser is a leaner, better-run, and more focused company than it has been in a long time. Coupled with a reasonable valuation, there could be some opportunity here for patient investors.

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Weyerhaeuser's Improved Execution Should Pay Dividends

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

Underlying Value And Housing Growth Support Weyerhaeuser

Weyerhaeuser (NYSE:WY) is a good example of a stock where it can be challenging to nail down the fair value. Cash flow doesn't necessarily account for the underlying value of the timberland and can miss the cyclicality of the housing cycles, but sum-of-the-parts net asset valuations can require a lot of work to find reasonable inputs/comparables for timberland valuation. Be that as it may, I think Weyerhaeuser offers decent value today on the strength of its extensive timberland assets and the improvements the company has made not only toward streamlining and focusing the business, but also in improving operating margins in the manufacturing operations.

It's been a while since I've updated my coverage on this company, but I think $30 to $35 a share is a reasonable (albeit wide) range for Weyerhaeuser shares, with $35 as the "sweet spot" on the basis of my sum-of-the-parts valuation. A trade war with Canada over lumber is a looming issue, but one that shouldn't hurt Weyerhaeuser, and I like the company's leverage to increasing housing activity albeit with some caution on what would be a potential oversupply of lumber into the market in the coming years.

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Underlying Value And Housing Growth Support Weyerhaeuser

Louisiana-Pacific Riding The Rising Tide

Back in February, I thought Louisiana-Pacific (NYSE:LPX) had upside into the high teens on improving housing numbers and stronger OSB pricing, and the shares are up close to 25% (to just under $19) since then as housing has been healthy and OSB prices have improved. Better still, the industry has remained responsible and restrained with respect to capacity, raising the possibility of even better pricing in the next year or two.

Lousiana-Pacific is closing its profitability gap with Norbord (NYSE:OSB) and Weyerhaeuser (NYSE:WY) in OSB, but also looking to expand its siding business as SmartSide continues to gain share in the market. It's important to remember that this is a cyclical stock (currently in the good part of its cycle), though, and that these good times won't last forever. There's still some upside to fair value based upon a full-cycle EBITDA estimate (and the possibility that more restrained competition will support a higher full-cycle number), but more of the upside in the shares now rests on the Street getting fired up about the housing/building material cycle and indulging in magical "it's different this time" thinking.

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Louisiana-Pacific Riding The Rising Tide

Seeking Alpha: Louisiana-Pacific Cleared For Take-Off, But The Flight Will Be Bumpy

Slow and steady may win the race, but it doesn't do a lot for stock valuations. The U.S. residential construction market has been improving, but you really wouldn't know that from looking at the performance of housing-related names like Mohawk (NYSE:MHK) and Armstrong (NYSE:AWI). Likewise, building material companies like Louisiana-Pacific (NYSE:LPX), Weyerhaeuser (NYSE:WY), Boise Cascade (NYSE:BCC) and Norbord (OTCPK:NBRXF) have been pretty weak since the middle of 2015.

I think Louisiana-Pacific remains what it has been for some time - a trading vehicle for playing market sentiment about the housing market. Housing starts could approach (or reach) 1.25M this year, and OSB pricing (North Central) has strengthened relative to last year. With no real OSB capacity additions on the way in 2016, industry utilization could move into the high 80%'s and that should be good for the sector. Likewise, LP is gaining traction with its SmartSide siding and views this as a growth opportunity. I have very little confidence in these shares as a long-term holding, but the shares should probably be trading in the high teens and could go into the $20s on more enthusiasm around the space.

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Louisiana-Pacific Cleared For Take-Off, But The Flight Will Be Bumpy

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

Seeking Alpha: Louisiana-Pacific Hit With Weak Pricing And Trouble With Regulators

Wood building products manufacturer Louisiana-Pacific (LPX) is having a tough time of it, as residential housing has been in a slow, erratic recovery and competitive OSB supply returns to the market. Making matters worse, regulators have not gone along with the company's contemplated acquisition of Ainsworth (OTCPK:ANSBF). Between poor OSB pricing and worries about the merger going through, Louisiana-Pacific shares have been left behind by other residential housing plays like Headwaters (HW), Stock Building Supply (STCK), and Universal Forest Products (UFPI).

LP still looks undervalued, but it's harder case to make. OSB pricing has shown signs of life and a pickup in residential building should be a "when, not if" question. An inability to close a value-creating deal with Ainsworth would likewise be a meaningful setback. Stripping the Ainsworth deal out, a key part of why I wrote LP as a Top Idea in September, I still believe that fair value for these shares is in the high teens, but it's hard to keep making a call based around patiently waiting for better operating conditions.

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Louisiana-Pacific Hit With Weak Pricing And Trouble With Regulators

Seeking Alpha: Improving Housing And A Major Deal Make Louisiana-Pacific Much More Interesting

The housing recovery trade seems to have hit a bit of a snag recently, as even hot trades like Home Depot (HD) and Mohawk (MHK) have cooled a bit recently. With mortgage rates heading higher and new construction activity still not that strong relatively to long-term averages, timber, lumber, and wood products companies have gotten dinged. While I had already been planning to write on Louisiana-Pacific (LPX) and point out that it seemed as though the market was pricing in too much skepticism about the OSB, siding, and engineered wood markets, the company did a deal that only makes the story more interesting.

In buying Canada's Ainsworth Lumber (ANSBF.OB), Louisiana-Pacific is not only adding capacity ahead of increased demand, but it is also improving its sales/margin mix, adding an Asian export business, and perhaps helping to quell fears that the industry will act irresponsibly with respect to capacity restarts/additions. While I'm actually surprised at how undervalued Louisiana-Pacific appears to be, it looks like there could be room here for 20% to 40% appreciation even after the strong positive reaction to the Ainsworth deal.

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Improving Housing And A Major Deal Make Louisiana-Pacific Much More Interesting

Investopedia: Louisiana-Pacific, Like Housing, Coming Back To Life

Residential housing construction is coming back to life. Although progress has been unsteady and comes off of an unsustainably weak base, demand is improving and Louisiana-Pacific (NYSE:LPX) is seeing the benefits. The stock has already roared back from its going-out-of-business-sale price, but these shares could continue to appreciate if Congress can avert the fiscal cliff and if other building material companies remain rational and prudent with their capacities and pricing.

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