Will Revival of Housing Market Aid Louisiana-Pacific (LPX)?

Louisiana-Pacific Corporation LPX has been gaining strength from the business transformation strategy, efficient cost-reduction plan, solid repair & remodeling activity, along with housing market revival.

The company’s shares have improved 17.7% over the past three months compared with the Zacks Building Products – Wood industry’s growth of 16.6%. Earnings estimates for 2020 have moved 28.3% north in the past 30 days, depicting analysts' optimism over its bottom-line growth potential.

However, COVID-19-induced economic slowdown and anticipated softness in businesses in the near term are pressing concerns for Louisiana-Pacific, which shares space with Armstrong World Industries, Inc. AWI, Masco Corporation MAS and Owens Corning Inc OC in the same industry.

Let’s delve deeper into the factors that justify its current Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth Drivers

Business Transformation & Efficient Cost-Reduction Strategy: Louisiana-Pacific is gradually transforming from a commodity producer to a more stable cash-generative business by increasing revenues and EBITDA mix. The company remains focused on improving the business by growing the Siding unit and simultaneously reducing cost. It has been mainly focusing on three areas - increasing the efficiency of mills by improving productivity, run time and quality through OEE initiatives; applying the best practices to its supply chain including procurement, logistics and working capital across $1.1 billion of addressable spend; and optimizing infrastructure costs.

In a bid to reduce costs, Louisiana-Pacific lowered the cost structure of its facilities through Lean Six Sigma efforts, sale or shutdown of underperforming mills and manufacturing facilities, as well as investments in technology. The Lean Six Sigma efforts continue to produce excellent returns from cost-saving and efficiency projects. The company resorts to a strategy of curtailing production at select facilities to meet customer demand, and optimize portfolio as well as margins.

Focus on Siding Business: It has been making efforts to increase the penetration of Siding products in repair/remodel and roll out SmartSide products. Louisiana-Pacific remains committed to grow strand Siding revenues in 2020 and beyond. For the long term (through 2021), it has reaffirmed SmartSide strand revenue growth rate of 10-12%. The company expects EBITDA margin in the Siding segment to be at least 20% in the long term, backed by strength of the Siding segment. Also, it intends to continue investing in selling and marketing of the business in 2020 and beyond.

Underlying Positive Housing Fundamentals: New home sales edged higher in April, with the easing of lockdowns in the country. Declining mortgage rates and unemployment level have been driving the U.S. housing industry in recent times. Per the U.S. Bureau of Labor Statistics report released on Jun 5, May unemployment rate declined 1.4 percentage points to 13.3% from 14.7% reported in April. Importantly, the largest unemployment rate post the World War Two was recorded in the April data. A 2.5-million employment gain in May was primarily led by growth in leisure and hospitality, construction, education and health services, as well as retail sectors. The company is expected to reap benefits from strengthening housing market conditions in the United States.

Headwinds

Coronavirus-Related Disruptions: Due to uncertainties surrounding the impact of the coronavirus, governmental responses and subsequent economic recovery, Louisiana-Pacific has suspended its SmartSide Strand sales growth guidance for 2020. The COVID-19 pandemic has adversely impacted demand, as is evident from the slowing down of the company’s pre-break-up log purchases.

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LouisianaPacific Corporation (LPX) : Free Stock Analysis Report
 
Masco Corporation (MAS) : Free Stock Analysis Report
 
Owens Corning Inc (OC) : Free Stock Analysis Report
 
Armstrong World Industries, Inc. (AWI) : Free Stock Analysis Report
 
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