[Sold as of Q2 2024 for a total gain of +53%. This thesis was written up retrospectively on the date below and refers to prices on Feb. 28, 2023.]
Date: Jul. 24, 2023
Louisiana-Pacific (LPX) is a building manufacturer with two main business segments: (1) siding and (2) oriented strand board (OSB). The company has seen strong demand for its siding products, and has converted a number of its OSB factories to produce siding. It is this segment that, in my view, appears to carry strong pricing power, and will continue to steadily increase in market share in the years to come.
LPX has benefited tremendously from increased construction demand over the last few years, but the party has recently grinded to a halt. Posting impressive incomes of $1.4B and $1.1B against a market cap of roughly $5B in 2021 and 2022 respectively, the last two quarters have been only break-even, with the company citing lower demand and increased costs. The company has aggressively bought back stock, reducing shares outstanding from 144M in 2018 to 72M today.
The 10-K boasts that over 50% of LPX's siding sales come from markets that are less sensitive to new housing cyclicality (such as sheds, repair, and remodeling) in what I believe to be an attempt to draw attention away from the fact that the company is highly cyclical, as evidenced by the wide fluctuations in revenue. The aggregate earnings however have been very good and assuming similar results in the future, are reasonably priced. Volatility in earnings and cash flow can really annoy investors, but not W.B., who's bought 10% of LPX over the last three quarters.
The main competitor is James Hardie Industries, whose well-known siding products are made with stronger fiber cement in contrast to the engineered wood used by LPX. Yet the siding made by LPX is generally less expensive, can be installed by a single person and does not require special tools. Over the long-term, I believe these factors will play a huge role in gaining significant share-of-mind with contractors and homeowners.
Louisiana-Pacific carries a reasonable $350M worth of 3.625% debt due 2029. James Hardie on the other hand is saddled with $849M in fixed-rate debt between 3.625% and 5%, due in 2026 and 2028 respectively. It also owes $230M under a revolving credit facility, and $858M in asbestos liabilities, totalling $1.9B of long-term debt on $1.6B of shareholders' equity. Similar to KRO/VHI, here a significant market share in the product is held by only a few companies, with one having a balance sheet that is significantly more robust (LPX).
Permanent loss of capital seems very unlikely given the low debt and dominant position of the LPX siding business. I allocated a good chunk of my portfolio to this company at a price of $58 per share implying a $4.2B market cap for the entire business.