Here's Why Investors Should Steer Clear of Louisiana-Pacific

Louisiana-Pacific Corporation LPX is bearing the brunt of rising material costs, and higher expenses associated with product introduction, and repair and remodeling activities for quite some time now. Also, weakness in the Engineered Wood Products (“EWP”) business is adding to its worries.

This leading manufacturer of high-performance building products has been missing analysts’ expectation for a while. The company’s earnings lagged the Zacks Consensus Estimate in six of the trailing nine quarters. In fact, the consensus mark for third quarter and 2019 earnings indicates a decline of nearly 70% year over year.

The company — which shares space with Weyerhaeuser Company WY, Universal Forest Products, Inc. UFPI and Norbord Inc. OSB in the Zacks Building Products - Wood industry — has underperformed its industry so far this year. The stock has gained 5% in the said period compared with the industry’s 24.2% rally. Estimates for 2019 have moved 37% south over the past 60 days, depicting analysts' concern over the company’s earnings growth potential.

Let’s delve deeper and try to assess what’s taking this Zacks Rank #5 (Strong Sell) company down the hill.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Higher Costs & Expenses: Louisiana-Pacific has been witnessing higher raw material costs, primarily for wood fiber and resins. Volatility in governmental, economic or industry conditions influences its wood fiber prices. Resin product costs are influenced by changes in the price and availability of raw materials used to produce resins like petroleum. The recent imposition of tariff on imported lumber raises a concern.

In first-half 2019, gross margin declined significantly to 13.6% from 29.1% reported in the prior-year period due to the above-mentioned headwinds. These headwinds are likely to prevail in the forthcoming quarters as well.

Additionally, the company’s bottom line has been plagued by higher expenses associated with repair and remodel channel penetration, and product introduction. In the past two quarters, adjusted EBITDA margin has contracted to 9.5% from 26.7% reported a year ago. Markedly, adjusted earnings per share declined more than 86% in the same period.

Lower OSB Pricing & Volume: Louisiana-Pacific has a high degree of product concentration around Oriented Strand Board (“OSB”), which had accounted for about 54% of North American sales in both 2018 and 2017. The highly concentrated nature of business makes it susceptible to price volatility.

Since 2018, the company has been experiencing pricing pressure in the OSB segment. Its bottom line suffered in the first half of 2019 due to lower OSB pricing across North American operations and a weak macro environment. Particularly in the OSB segment, adjusted EBITDA margin was just 1% in the said period compared with 38% in the comparable year-ago period.

Importantly, management has decided to remove all commodity OSB production from its Siding mills and reduce production at the Peace Valley facility in British Columbia for the rest of 2019.

Housing Market Slowdown: Overall housing industry has been witnessing declining mortgage/interest rates, and steady job and wage growth over the past few months. However, these positives are not working in favor of potential homebuyers. Lower spending, declining home sales, higher material costs and lingering trade conflicts are hurting the industry.

In the second quarter, total housing starts were down 3% year over year, with single-family starts declining 6%. Severe rainfall in first-half 2019, particularly in the South, mostly impacted the results. The company believes that nearly 40% of SmartSide revenues are based on single-family housing. Given slower housing starts, it reduced SmartSide Strand revenue growth target to 10% in 2019 and 10-12% in the long term compared with 12-14% expected earlier.

Although the company has been undertaking various strategic initiatives to boost performance, the above-mentioned factors are likely to remain headwinds in the upcoming quarters as well.

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