Morningstar | Louisiana Pacific Experiences Some Margin Pressure as Panel Prices Slide; Maintaining $18 FVE. See Updated Analyst Note from 06 Nov 2018
Louisiana Pacific's third-quarter sales declined to $737 million, down from $811 million in the second quarter, as both panel and lumber prices declined. Fewer supply bottlenecks, matched with somewhat weaker U.S. housing demand, took the air out of recent highs for wood product prices. However, we had already expected as much, and our outlook for 2018 is little changed. Margins were respectable in light of pricing weakness, and siding profitability actually strengthened during the quarter. We've left our $18 per share fair value estimate in place, along with our no-moat rating.Versus the prior quarter, the Random Lengths OSB Composite index fell 20% to average $379 per thousand square feet. A similar story played out in lumber prices over the same period. This drove OSB segment sales lower to $349 million in the third quarter from $387 million last quarter. Segment-adjusted EBITDA margins also contracted to 37% from 44%.
On balance, however, given the near-$100 drop in North American prices, LP's profits held up fairly well. Performance in LP's siding segment was slightly better than we had expected. While sales slipped to $241 million, EBITDA margins actually strengthened slightly to 28%. As the company dedicates additional capacity to siding production, we expect volumes to rise and take some share from heavier and harder-to-install alternatives. While EBITDA margins in the mid-20% range seem achievable as the housing market heats up, we think midcycle margins will fall closer to 15%.
Performance in LP's remaining segments was decent. South American sales fell versus the prior year, with margins down slightly as well. Given the political turmoil during the quarter, we expect this to be largely transitory, and we see long-term potential for the segment. Engineered wood performed more admirably, generating consistent double digit margins after years of fairly weak performance.
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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