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| Louisiana-Pacific
Still Offers Great Value for Long-Term Investors |
Published: March 27,
2007
Back in November
2006, we profiled lumber company Louisiana Pacific (NYSE: LPX) as an
undervalued stock worth tracking. Since then, conditions in the housing
market have continued to deteriorate. That, in turn, has put pressure on
companies like LPX that supply products for home construction or
remodeling.
As a reminder, Louisiana Pacific is the nation's leading producer of
oriented-strand board (OSB), an engineered composite wood product that
is similar to plywood, except uniform in strength and less expensive to
produce. OSB is quickly replacing plywood as the most common sheathing
material in manufactured housing and new home construction, and it
continues to gobble up market share -- now controlling more than 60% of
the panel market in North America.
As expected, the company posted soft fourth-quarter and full-year
financial results earlier this month. Sales for the year slipped -14%,
and the bottom line picture looked even worse, with earnings tumbling to
$1.19 per share from $4.34 in 2005. Not only has lower demand cut into
the firm's volume, but OSB prices have plunged as well. Oriented strand
board is sold as a commodity, and LPX has little control over the prices
it can charge.
Management was refreshingly candid with its assessment of business,
suggesting that it could still be a while before the excess housing
inventory on the market is absorbed. Once that happens, new home
construction should finally pick back up, increasing demand for OSB,
siding, and other LPX products.
Generally, we prefer companies with some degree of pricing power,
particularly when input costs are rising. This usually rules out those
firms selling commodity products, which are seldom in a position to
recoup rising expenses by passing them along to customers. Nonetheless,
we still believe that LPX is worth exploring for long-term investors
willing to wait out this slowdown.
Though residential construction can be highly cyclical, rising
populations and other favorable demographic factors means that new homes
will always need to be built. In the meantime, there is also remodeling
to consider. According to the company's latest 10-K
filing, there was a boom of construction activity in the late 1970s and
early 1980s. Those homes are now 25-35 years old, an age that has proven
to be highly correlated with higher repair and remodeling expenditures.
We therefore believe remodeling activity could be a key source of demand
over the next several years. And considering annual OSB production is
expected to grow by 11.6 billion square feet over the next five years,
while plywood production is projected to fall by 6.4 billion, it is
clear that OSB will capture a large amount of remodeling spending.
The problem with a cyclical downturn is that you can seldom see the
light at the end of the tunnel. However, in most cases the stocks
actually recover well in advance of the underlying business
fundamentals. In other words, waiting until the whole world can see that
a housing recovery is underway will probably do little good -- shares of
LPX and others will have rallied sharply by then.
Perhaps Warren Buffett said it best: "You pay a very high price in
the stock market for a cheery consensus. Uncertainty is the friend of
the buyer of long-term values." Given that uncertainty, LPX could
continue to drift lower, or it might remain where it is for many months.
However, in our view the firm's long-term outlook is rock-solid, so
there is no need to pinpoint the exact bottom to earn a hefty profit.
With a revised fair value of $31, we think the stock is quite attractive
at today's price. As always, things might get worse before they get
better, but the shares have already been pushed below the firm's book
value. It may take some time, but we are confident these abnormally
tough operating conditions will begin to revert back to the mean,
sending LPX back in the right direction.
Thanks for reading!
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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