Morningstar | Louisiana-Pacific Continues Its Push Toward Siding, but Results Remain Tied to OSB for Now
Louisiana-Pacific shares leaped roughly 10% after the company released its fourth-quarter earnings, mainly due to the announcement that management would spend over $600 million to buy back shares in 2019. Management targets 12%-14% growth in its siding business, though we contend that a portion of growth will hinge on housing market conditions, which are uncontrollable. However, we increased our siding volume forecasts for LP over the long run, given management's intention to continue building out capacity for this relatively low-cost but durable siding option. Based on our updated forecast, we raise our fair value to $19 per share from $18. Our no-moat rating is unchanged.One benefit of LP's siding segment will be increased earnings stability compared with OSB. Because OSB is principally used in new home construction, price and volume are tied to homebuilding. In contrast, siding is replaced on existing homes over time, and LP's small market share gives it the potential for market share gains as well. This should lead to steadier increases in sales over the coming years, versus OSB. In the fourth quarter, the siding segment was the only segment to hold sales flat amid falling wood product prices. SmartSide volumes rose 5% in the fourth quarter, and another 5% due to price increases. We see further price gains in 2019, along with roughly 14% in volume growth as the Dawson Creek mill begins ramping up siding production during the year.
Until LP more fully pivots away from OSB, overall profitability remains tied to new home construction. Fourth-quarter revenue dropped by roughly a third from last year, in line with commodity OSB prices. This disproportionately affected consolidated adjusted EBITDA, which fell to $65 million in the quarter, down $138 million from last year. Although we expect panel prices to rebound from recent monthly lows, overall profitability will be far lower, given how strong the first half of 2018 was for LP's OSB business.
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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