helivideo/iStock via Getty Images

helivideo/iStock via Getty Images

My last article on Louisiana-Pacific (NYSE:LPX ) was a continuation of the first article I wrote on the company - and the trend continues much in the same way. My stance, to "HOLD" or not to buy the company at this valuation, proved to be the right one, as we can see here.

Namely, the company is down quite a decent amount, and you'd have lost quite a bit of money investing at a too-expensive valuation.

We always try to invest at what is a "cheap" price. Sometimes we manage to do just that. Sometimes we do not. In this case, I'm of the firm opinion that all signs were very clear insofar as where the company traded.

Let's look at what exactly, if anything, has changed since my last piece.

In my first article, I called Louisiana-Pacific exactly what it is - a quality play on building materials. This is a sector I like. Over the years, I have owned significant portions of my portfolio in building materials investments.

LPX is a business operating in very attractive, at least fundamentally, segments.

The company, when I began writing on it, also had an Engineered Wood Product segment, known as EWP, but this was sold on August 1st.

As I also mentioned in the article, OSB is the far largest segment with near 45% of net sales revenue - siding is the second-largest with over 33%. This makes the remaining segments somewhat smaller in their scope.

The company markets its products through traditional distribution in professional product dealers, home centers, and third-party buying groups as well as end-users such as homeowners. LPX has both DIY and professionals as their customers, which are very attractive customer segments.

Insofar as those customers go, the company's top ten customers account for around 45% of sales.

These include wholesale regional/state distribution companies that, distributors, and professional dealers specializing in sales directly to professionals and distribution firms, as well as Retail home centers you're very familiar with such as Home Depot (HD) or Lowe's (LOW).

The company remains a market leader in key segments in which it operates.

In fact, 2Q22 results, which were released only a week ago or so, saw the company improving results to a degree that gave me some surprise to see just how violently the company reacted in terms of the share price.

Siding Solutions saw a 24% YoY sales increase, which is yet another quarterly sales record, breaking the previous one. Structural solutions also increased sales by 28%. The company bought back over 7.3M shares at a price of not far from half a billion dollars, taking advantage of what they viewed as a cheap valuation for their company, which the market for the time being seemed to disagree with.

We start understanding the reaction when we dig down into the results. Despite impressive results in key segments, this could not make up for the price drops in OSB, which is what the company has been struggling with for some time (its OSB exposure). These trends saw the company's net sales drop 3% company-wide, but more importantly the FCF-proxy EBITDA drop by over 25% YoY. Even including the now-sold EWP segment, it still wasn't a good quarter in terms of EBITDA.

This saw the company's EPS drop by nearly half a dollar per share, and we start to understand the negative trends dictating the company's share price.

LPX is very exposed to raw material inflation trends and logistical costs. Any sort of input cost increase here goes directly to the company's bottom line - and not just in OSB either. The company deserves a lot of credit for managing to keep Siding stable with the raw material and freight impacts seen in this quarter.

OSB was far worse, with near-on $200M worth of overall structural solution and commodity impacts, and over $200M if we include raw material and input impacts, leading to the decline we're seeing here.

There was roughly a $100M EBITDA benefit related to the company's ongoing strategic transformation and viewed a certain way, this offset the company's ongoing challenges fairly well.

However, it's important to view these impacts as indicative of broader potential volatility that is definitely part of investing in LPX. The company considers it likely that the full-year CapEx will be around $430M on the high end, and calls for a 20% Siding solutions growth in the next quarter. Also, the company expects OSB - the company's most important segment, to keep falling.

Not just fall, but a 40% YoY drop in 3Q22. LPX does not give us OSB full-year guidance but calls for Siding Solutions to grow around 20% for the full year. This is excellent, but it does not offset the loss of income from OSB.

This is the key reason why the market is negative on this company here.

The company did emphasize overall healthy demand, but LPX cannot provide shareholders with impressive growth when its Oriented Strand Board segment can't provide future growth. Remember, OSB is even more of sales now - 60% of 2Q22 as an example.

Prices did stabilize somewhat (pricing is the crucial part here), but the company's segment - and product-specific forecasts are usually very solid - and when LPX forecasts a significant drop in OSB, you should listen.

The issue remains the degree of earnings cyclicality here because LPX is one of the worst cyclical businesses I've ever reviewed.

This wouldn't be as much of an issue if the company had dividend floor strategies and EU-like trends like say, Norsk Hydro (OTCQX:NHYDY), but it doesn't.

Earnings trends for this company are truly somewhat jarring - take a look.

Louisiana Pacific Earnings (F.A.S.T. Graphs)

Louisiana Pacific Earnings (F.A.S.T. Graphs)

Now, the obvious hope is that the company's new structure and organization will result in a less spotty EPS trend. Forecasts seem to slowly suggest this, but I think it's far too early to call any sort of significant trend or pattern here. The company remains extremely volatile.

However, to be clear, I don't mind trends like these, because you can't just look at EPS and expect it to give you the whole picture.

However, from what I see, the company itself isn't all that forward-considering, at times, when considering its strategy or sales. Granted, visibility for this sector is at times extremely low, but an investor trying to make decent returns with safety here is often left at the mercy of very cyclical trends.

Take the dividend, for instance. Until a few years back, the company didn't even have one. LPX didn't reintroduce the -08 canceled dividend until 2018.

It also had several years of negative or very poor returns, and even after extremely good trends as we're currently seeing, the main questions become just how the company can manage the cash flows coming in, as well as how long we can expect this boom to continue for.

While the company seems to be doing everything right - lowering the volatility and trying to provide more forward clarity, there are unfortunate things the company can't change. LPX remains extremely correlated to housing and reno.

It should be evident to anyone that the current trend in housing and demand is situational and cyclical. It will not last, and the company should be using all of its energy not used on maintaining and expanding capacity to meet demands to try and soften some of the cyclical lows beyond what we've seen for the past 20 years. The situation is already in the midst of shifting.

So, here's what I see for LPX. I see that trading at a rough 5-year average, the company still presents at a relative overvaluation because the 5-year RoR comes in at less than 8% annually when looking at a 12.31x 2024E P/E. It currently presents no more than a 1.5% dividend. This is after the recent set of drops.

While investors in 2021 would have just about outperformed the market if investing in 2001, this outperformance is only a result of the 2020-2021 demand spike. If the corresponding valuation increase had not occurred, both your capital appreciation and dividends would have been less than most index averages. What's more, if you bought the company at P/E highs of around 10.5X, you wouldn't actually have outperformed the market even now - and the company is still trading at a 5-year normalized EPS of around 7-8X, depending on where you look at the earnings. I don't consider anything less to be a dependable or conservative consideration at this point, because I don't see the company's earnings during the past and this year to be repeatable outside of the housing market we've been seeing.

I want to reiterate - This company cannot really be forecasted accurately. It either beats or it fails forecasts to a degree that highlights just how low the visibility is, with negative earnings misses of between 89-1142%

This is not a bad company. But there are times when a good company isn't necessarily a good investment if you're looking for stability and dividends. I am looking for that stability and those dividends, and the only way I would buy LPX is if the company is dirt-cheap, or at the beginning of a clear boom in the housing market.

I don't see this at this time.

While analysts don't technically disagree, they would argue that LPX is 15% undervalued to an average stock price target of $70.75/share, based on 8 analysts with currently more than 50% having a "SELL" or "HOLD" target. This sounds somewhat odd - but that's the thing with analysts. Their average targets have been going down since considering it at a record high of over $85/share with an undervaluation of 38%. This is a testament to the notion that you shouldn't consider the targets and their undervaluation here to be necessarily indicative of where you should buy. There are still over 50% at either "HOLD" or some sort of "underperform" rating, and this is the one I choose to go with here.

I don't see a good reason to buy LPX at anything above a 1X sales multiple, and preferably lower than that. I would argue that LPX is buyable at below $40/share, which we saw less than a year ago.

No more than $40 - and preferably less.

That's when I'd become interested here.

My thesis for LPX is:

1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

This is a clear "Hold" to me still.

The company discussed in this article is only one potential investment in the sector. Members of iREIT on Alpha get access to investment ideas with upsides that I view as significantly higher/better than this one. Consider subscribing and learning more here.

This article was written by

36 year old DGI investor/senior analyst in private portfolio management for a select number of clients in Sweden. Invests in USA, Canada, Germany, Scandinavia, France, UK, BeNeLux. My aim is to only buy undervalued/fairly valued stocks and to be an authority on value investments as well as related topics.

I am a contributor for iREIT on Alpha as well as Dividend Kings here on Seeking Alpha and work as a Senior Research Analyst for Wide Moat Research LLC.

Disclosure: I/we have a beneficial long position in the shares of NHYDY, LOW, HD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment. Short-term trading, options trading/investment and futures trading are potentially extremely risky investment styles. They generally are not appropriate for someone with limited capital, limited investment experience, or a lack of understanding for the necessary risk tolerance involved. I own the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in my articles. I own the Canadian tickers of all Canadian stocks i write about. Please note that investing in European/Non-US stocks comes with withholding tax risks specific to the company's domicile as well as your personal situation. Investors should always consult a tax professional as to the overall impact of dividend withholding taxes and ways to mitigate these.