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About Louisiana-Pacific

Headquartered in Nashville, Tennessee (oddly enough), Louisiana-Pacific is an engineered wood manufacturer.

Please hold the applause.

In repeating myself for emphasis and because things are just about to get so exciting, the company manufactures and sells engineered wood building products that are most commonly used in residential, industrial, and commercial construction contexts, maintaining two primary revenue drivers, with the two streams being siding and oriented strand board (OSB). Siding is the company’s division of producing and selling wood siding and trim, with the OSB division being where the company manufactures and sells structural panel products that are used in the construction of homes, including repair and remodeling projects. 

In being a bit more specific about the company’s main products, siding is a sort of material that is used to protect the exterior of one’s house, or other complexes, such as apartment communities and commercial complexes, mainly from weather elements (i.e., rain, wind, snow, etc..), also serving as a means of insulation for homes, contributing to energy efficiency and at the end of the day, it can boost the aesthetic of the exterior of any given complex. In terms of oriented strand boards, they are essentially a type of wood panel used largely in the context of construction of homes and the other aforementioned complexes, specifically used in constructing roofs, floors, and walls, providing structural support, which is kind of important, I guess.

Now that we’ve outlined this company and what it does, it’s time to learn some more.

In embracing my tried-and-true realist tendencies, I’d like to first point out that when pondering not only the current economic cycle but also the more than likely one over the next 18-24 months, I’d say the future doesn’t look as kind as the recent past for a major building and construction supplier such as this one. Primarily, it is my most calculated understanding that we are currently in (during the time of this initial publication, that is) what is best categorized as a “medium-to-high economic cycle,” and my reason(s) for saying this is rooted in my opinion(s) that the Federal Reserve will have to pivot its current rate current trend and transition into higher rates in the short-to-intermediate term (as inflation and associated pressures don’t seem to be as transitory as they were initially assumed to be), paired with an upcoming second Trump presidency that has a high likelihood of being littered with policies rooted in continued stateside economic growth, among other factors that I mentioned in my last article.

It is also apparent this is a company that is going to be sensitive to the real estate market, and with my projections on rising rates, which invariably translates into higher costs for builders, meaning less build, which means less demand for supply, doesn’t bode well for Louisiana-Pacific. Pairing this with the recent lumber prices have been quite volatile (again, largely at the mercy of the real estate market and the extensive supply and demand dynamics therein, among others), which can put a lot of stress of profitability and general guidance, and how even though Louisiana-Pacific can, at times, offset these profit impacts (in the case of falling lumber prices due to softening demand) through heightened volumes, volumes in recent quarters have also been softening, with, for example, the company’s Q3 2023 net sales falling over 14% year-over-year. Also, certain growth regions in the real estate market (the Sunbelt, for example) are experiencing excess supply, which is bound to put even more pressure on lumber prices and this business in the short-intermediate terms.

Of course, once supply and demand become more synchronized, this company is poised to get back on track, but this is the picture I see now and for the foreseeable future.

Plus, while this should be noted as being a much less substantial reason yet a reason nonetheless, its stock price over the last twelve months has nearly doubled, and while I don’t think it is best to make this a primary factor to consider when pondering an investment in Louisiana-Pacific (or any other companies for that matter), I don’t recall hearing Warren Buffett asserting that buying near tops and selling at bottoms was a profitable strategy.

Evidently, there are a handful of cyclical headwinds that must be accounted for, and while some might say that it isn’t everything, to me, it sure is a lot.

If you disagree, have at it, as perhaps you might think that I am looking around the corner a bit too much, but this is indeed how some of the greatest money managers of all time have gone about investing, being rabidly future-concentrated.

At any rate, a few reasons to like this company include (besides its performance when rates come down and demand outstrips supply in real estate again), its pure focus on siding and OSB markets, also accounting for the fact that  Louisiana-Pacific has a market share of 16.90% within the Forestry & Wood Products industry along with a 5.60% foothold in the Basic Materials sector, hinting at it having some pricing power in order to help it hedge against rate fluctuations and lumber price swings, not to mention that the performance within its siding segment has been quite strong, reporting a 22% net sales increase in the third quarter of 2024, along with its continued global expansion into new global territories, recently inching into growth regions such as Brazil and Chile.

Nevertheless, I myself am about to have at it and walk you through the company’s financial position and pertinent ratios and metrics so as to develop a clearer picture of Louisiana-Pacific as an investment in its own right.

LP’s stock financials

Louisiana-Pacific is an $8.3 billion company with a stock price of $111.85, a price-to-earnings (P/E) ratio of 19.84, with the company also distributing a current annual dividend of $1.04, initially not telling me much, but the little that it does whisper is that this company’s stock, for all initial intents and purposes, is trading at fair value, given the commonly held fair value benchmark of 20

I’ll just say that as I’ve been learning more through analyzing hundreds upon hundreds of companies and their stocks, I’ve come to believe that, sure, while relative valuation metrics such as price-to-earnings ratios can be useful, they shouldn’t by any means serve as an end all, be all, as I’ve seen time and time again that Mr. Market doesn’t often care all that much about strictly adhering to the P/E benchmark of 20, but rather is focused largely on current and future sentiment, the latter being particularly accurate being that it’s been found that the stock market tends to actually lead market/economic fundamentals by six-to-twelve months, all the more reason to be forward-looking and not bogged down by a price-to-earnings ratio.

Ultimately, okay, LP’s stock (NYSE: LPX) can be said to be trading at basically fair value at the time of this draft, but that isn’t something that is likely to make the price of the stock move one direction or the other.

What might have a bit more impact is the condition of the company’s balance sheet, with Louisiana-Pacific’s leadership in charge of $2.4 billion in terms of total assets and $880 million in terms of total liabilities, showing nothing less than a solid balance sheet, and given all of the cycles and potential headwinds that could mire this company in its tracks, having a durable balance sheet such as this one in order to weather these sorts of storms is a point of attraction. I’ll also briefly point out that the company is in a great spot in terms of servicing its near-term debts, with it maintaining total current assets in the amount of $778 million and $259 million in terms of total current liabilities, also holding a debt-to-equity ratio of 20.8%, beyond indicating that the company is not highly leveraged, for each one dollar of equity, it has 20.8 cents of debt, more than suggesting great coverage.

On the basis of the company’s income statement, LP’s annual revenues have spoken to the cyclicality I mentioned in previous paragraphs, with 2020 and 2021 being prosperous and opportune periods for Louisiana-Pacific, which is sensible since immediately following COVID-19, recovery was on the prowl, and the sizable growth in demand for building materials amidst a booming housing market (largely due to inordinately low interest rates, and a brief bout of deflation, or real rates below 0% in 2020), along with mortgage rates sitting at historic lows in 2020, rates hitting their lowest point (in recent history) in 2021, the average 30-year mortgage rate during the same year sat at an incredibly low 3.15%, but rates subsequently rising due to the onset of inflationary pressures in 2022 and 2023 (too much money chasing after too many goods and services), with the average 30-year fixed mortgage more than doubling to 7% in 2023, having a direct impact on revenues. More specifically, as the Fed raised interest rates in 2022 and 2023, LP’s total revenues fell from a peak of nearly $4 billion (2021) and withered down towards its latest reported figure of $2.5 billion (2023), once again due largely to the slowdown in the cool down period in the housing market induced by higher interest rates and mortgage rates, that disincentivized home ownership and, thus, home building and construction, and demand for Louisiana-Pacific’s products.

With regards to the company’s cash flow statement, LP’s total cash from operations have maintained a vastly similar posture than that of its revenues, peaking in 2021 and coming back down in rather dramatic fashion in 2023. For instance, it reported total cash from operations of just about $1.5 billion in 2021, with profitability and cash from operations being damaged by high rates down to $316 million, per its report in 2023.

When it’s all good, it’s all good, but when the rate train rolls through and the housing market begins to freeze over, it’s not all peaches and roses, and although this company has the financial wherewithal to sustain such market undulations, given where I think the market is headed and its track record in operating within inflationary periods, let’s just say I am not exactly jumping out of my seat to get my hands on this company and its stock.

LP’s stock fundamentals

It is also my opinion that focusing too much time and effort on the company’s most recently reported net profit margin shouldn’t be the play here, as this is evidently subject to change given the economic/housing environments, but at the moment, according to Charles Schwab’s platform, Louisiana-Pacific’s is pegged at 13.67%, and when comparing this figure to some of its most direct, publicly traded competitors, such as Boise Cascade and West Fraser Timber Co. Ltd., respectively holding net profit margins of 5.95% and -1.53%, it isn’t hard to tell that it pays to be a focused leader in the home building space, in and of itself.

Should you buy LP stock?

Don’t get me wrong, this is a great company, with a business model that is seemingly working quite well accompanied by a management team littered with long-time experience in siding, OSBs, and building and construction as a whole, and internally, the company has a superb balance sheet, but to me, this potential play comes down most to cyclicality, and given my previously stated projections relating to rates (again, both interest rates and mortgage rates, and the implications of the federal funds rate as well), and how the Fed is more than likely going to have to pivot back into higher rates to combat inflation, I’ll remain mentally flexible as essentially any situation in the market is one that is constantly developing, but given these projects, it feels most sensible to offer this company’s stock (NYSE: LPX) a “sell” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

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