Last year, lumber company Louisiana-Pacific (LPX) had a 104.89% run-up in share price to about $78.
I hold a bullish position but with a niggling reservation, i.e., the shares will not move up much in 2022. I concur with the consensus among analysts rating LPX a Moderate Buy. The average Louisiana-Pacific price target over the next 12 months is $82; that is an implied upside of 16.8%.
TipRanks’ Smart Score is a 6 out of 10. Sentiment in news coverage is neutral. Investor sentiment is very negative.
LPX is a financially healthy company. Its technicals are positive. Momentum is up 100% over the past 12 months. Return on Equity Asset Growth is 114.66%. Insider buying and selling is mixed, and not a bellwether for any recommendation.
Hedge funds, however, cut LPX shares over the last six months and sold two million shares in the last three months.
Forests, Lumber, and Mills
Louisiana-Pacific is in the lumber, fiberboard, and cellulose insulation business. Its 5,000 employees manufacture engineered wood building materials for structural framing to the finished siding. It operates 24 mills: 14 in the U.S., seven in Canada, two in Chile, and one in Brazil.
L-P is in the forestry business as well. Forestry is an essential industry in the American economy. It has a $53-billion annual payroll. L-P opened in 1973 spun off from Georgia-Pacific, the sixth-largest lumber company.
L-P is the 11th largest forestry company in the world, controlling about one million acres of timberland. The company invented alternatives to plywood and other solid wood building materials. L-P is renowned for using lumber from alternative trees, replacing big trees as the preferred choice.
There’s Profit in Inflation
LPX shares grew in price over the past two years when pent-up demand for housing and goods spiked during the pandemic. Soon after came spiraling inflation to the highest rate since June 1982.
Lumber prices followed, topping $1,515 per thousand board feet. Saw-mills increased prices. Wages of workers in forestry, lumber, and construction popped; hauling costs from forests to mills, from mill to yards, and deliveries to construction sites increased. Prices of furniture and cabinets made from wood skyrocketed in 2020 and 2021.
Flooding in Canada blocked roads and rail adding to the costs of lumber. The U.S. market is still reeling from Brazil’s 369.7% summer price increases. Prices dropped by the end of 2021 but popped in January ’22, 6.3%.
Q3 2021 results compared to the third quarter of last year are stellar. Revenue was up 53%, to $1.2 billion this last quarter. OSB prices and Siding growth added $225 million and $31 million, respectively. EBITDA increased year-over-year from $273 million to $522 million.
L-P beat Q3 estimates on non-GAAP EPS by $0.45. Markets love when that happens. Cash from operations was $511 million. The healthy financial report and cash position contribute to the modest short interest rate of 4.3%.
L-P has $607 million in cash. The total debt is only $375 million. Operating cash flow is $1.6 billion. Levered free cash flow is $1.21 billion.
The Chairperson and CEO optimistically describes management’s responsiveness this way: “When faced with raw material scarcity, we have consistently allocated limited resources to the most strategic applications. (For instance) freight, flatbed trucks are in tight supply, we have the ability to convert shipments from truck to rail, and we have our own small trucking fleet, both of which contributed to record siding shipments in the quarter.”
The low dividend yield on LPX (0.9%) leaves me skittish. Investors might get a better return in the long run, as the company increased the dividend twice in 2021.
Vulnerabilities
LPX is a low-risk investment. There are vulnerabilities. The Q4 2021 consensus is the EPS will be $1.94 versus $2.01 year-over-year.
First, lumber is a basic commodity. Prices are subject to parabolic events. Lumber prices fell 70% between April and December ‘21 before popping up in January ’22.
The good news for investors is that L-P management knows how to capitalize on inflation. If the price triples by 2025, as predicted, demand for wood house frames, furniture, cabinets, etc. might soften.
Second, the shortage of new single-family houses keeps up the demand for lumber. However, a recession and higher U.S. tariffs on Canadian lumber (17.99%, up from 8.99%) can keep LPX hovering in the low to mid-$80 per share through 2022.
Bad weather will hamper the supply chain. British Columbia is dealing with an outbreak of mountain pine beetle. Wildfires and sawmill labor shortages are affecting L-P growth.
A fourth vulnerability comes from the intentions of the Federal Reserve to raise interest rates. Higher interest rates mean higher mortgage rates. Would-be new house buyers might walk away.
A fifth vulnerability is the volatility of LPX. The LPX levered beta is a lofty 2.07; that is much higher than the market volatility. Unemployment is low, so housing demand is still up.
The Last Lumber Haul
I do not envision a much lower share price in the next 12 months, but there are a lot of conflicting signs for the industry and stock.
LPX shares will not repeat the meteoric price rise investors recently enjoyed. Conditions are too tenuous and the vulnerabilities weigh heavy. However, the shares remain at low risk for any precipitous downward draft. I am confident management is prepared for all eventualities, but some may be out of its immediate control.
Georgia-Pacific was a symbol of American prosperity after the World War II. Investors received shares of LPX in the spin-off. But LPX never enjoyed the good fortune of G-P that eventually sold to Koch Industries.
LPX wandered in the woods of the high-teens and twenties for a decade, paying an unrewarding dividend. Raising the yield ought to be high on the agenda of this cash-rich company.
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