Morningstar | Louisiana Pacific Benefits From Another Strong Quarter of Panel Pricing; Raising FVE to $25. See Updated Analyst Note from 07 Aug 2018
Louisiana Pacific managed a robust second quarter. With both panel and lumber prices surging beyond even our lofty expectations for the year, sales and EBITDA both remain ahead of pace for the year. We've increased our annual forecast for the Random Lengths OSB index to reach $410 before easing next year as additional supply enters the market. Accordingly, we've lifted our fair value estimate to $25 per share from $23 to account for higher near-term cash flows, driven by higher pricing, and time value of money effects. Our no-moat rating is unchanged.In LP's OSB segment, sales rose 19% to $387 million during the second quarter, with the increase largely explained by elevated wood panel prices. Panel prices were up nearly 30% from last year, peaking in the mid-$400s early this summer. With Canadian supply constraints beginning to ease, we think those prices will begin to ease as well over the coming months. Even so, EBITDA margins should remain above 35% for the year. Though we expect relatively little investment within this segment by LP as it pivots toward siding, its larger peer Norbord is building capacity by restarting and improving a number of its idled facilities.
LP's other major segment, Siding, also performed admirably in the quarter. Segment sales rose 13.4% versus last year to $262 million. Adjusted EBITDA rose even more meaningfully, up 27%, benefiting from a combination of higher operating rates driving down unit costs, and an uptick in OSB prices, some of which is manufactured in this segment. We expect LP to focus its investment on this segment going forward, gradually converting OSB assets to siding production. We expect EBITDA margins to rise slightly over the next five years as demand for building materials rises amid surging demand for new home construction in North America. In midcycle conditions, we expect EBITDA margins in the midteens, as we believe this segment still lacks a sustainable competitive advantage over siding peers.
Louisiana-Pacific is a provider of building solutions serving the new home construction, repair and remodeling and outdoor structures markets. The company has four segments: siding, which includes LP SmartSide? Strand and Fiber trim and siding, as well as LP Outdoor Building Solutions? products for outdoor buildings; oriented strand board (OSB), which manufactures and distributes OSB structural panel products; engineered wood products, which include LP SolidStart? I-Joist, Laminated Veneer Lumber, and other related products; and South America, which manufactures and distributes OSB structural panel and siding products in South America and certain export markets.
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