Louisiana Pacific investment

I took a brief look at the new 13F disclosed investment in building products company Louisiana Pacific, best known for siding.

With home starts down as mortgage rates rise and recession looming, latest qtr showed decline in revenue and earnings. However stock has handily outperformed S&P 500 over 1, 3 & 5year periods.

The company has repurchased about half its shares since end 2018.

LPX is trading at PE and P/CF of below 5 and PS near 1.

Balance Sheet is strong with cash exceeding LT Debt.

With a market cap of $4.2 billion, Buffett could easily buy the whole company if he chose to.

Stock is up over 11% today most likely on news of Berkshire’s disclosure.

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Thanks for pointing out Louisiana Pacific. Sounds like a good prospect for a small-mid cap value pick, a sector I like to emphasize in my portfolio. I’ll do some reading up on them.

Some quick notes: LPX had, as you note, very low PE this year. Earnings were very high the last two years, with trailing 12 month diluted earnings $13.32/share compared to recent price $62.13. But we all know how lumber products were sky high with the building industry cranking in high gear and pandemic supply chain problems.

The prior 4 years diluted earnings per share 2020-2017 were $4.46, $(0.04), $2.76, $2.55, with operating earnings and free cash flow similar. Average earnings were $2.34 over those years. So, first glance indicates to me that not only will LPX suffer from normal business cycle drop in business as the construction market cools, but it’s going to fall from an unnatural peak high with little prospect to recover those highs when the business cycle returns to normal.

The balance sheet looks nice, and they’ve been putting substantial money into capital expenditures the last couple years, so the baseline profit over the business cycle is probably up compared to pre-pandemic. I trust Buffett, of course, but this stock is probably a nice bargain, not a screaming one.

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Rising interest rates and recession are likely to drive down lumber volumes and pricing. That should make it an opportune time for those who prefer to buy low and sell high.

The other big use of timber is paper. How does that fit in? In the early days they told us, computers went through lots of high quality paper. But now with more and more data on screen and unprinted, you wonder. Print newspapers and magazines must be in decline. Catalogs and newspaper inserts must also be in decline.

No wonder the price of Kleenix and toilet paper is skyrocketing. As volumes fall elsewhere you make your numbers by raising prices.

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LPX only does building materials. Siding, OSB, joists, prebuilt framing.

No exposure to pulp or paper.

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