Top picks from S&P: Louisiana-Pacific
Look for more growth from this maker of building materials as the housing rebound continues.
(This post is part of a special report featuring 7 Top Picks from S&P Capital IQ.)
By Stuart Benway, S&P Capital IQ, The Outlook
Sector: Heavy Machinery & Materials
(LPX) is one of North America's largest producers of oriented strand board (OSB) and also manufactures wood siding and engineered wood products. It serves many of the same uses as unsanded plywood, including roof decking, sidewall sheathing, and floor underlayment, but can be produced at a significantly lower cost.
The OSB segment (47% of 2012 sales) produced 3.7 million square feet of board in 2012, up from 3.3 million square feet in 2011.
The company's products are used primarily in new home construction, repair and remodeling, and in manufactured housing. Most of the markets in which the company competes are cyclical, capital-intensive, and highly competitive.
Demand correlates to a significant degree with the level of residential construction and remodeling activity in North America, which has historically been highly cyclical.
This cyclicality is influenced by the supply of new and existing homes on the market, the level of unemployment, long-term interest rates, the availability of mortgage financing, and mortgage foreclosure rates.
Louisiana-Pacific is trying to lead product innovation in wood and wood composites to better address the needs of its customers.
In the siding business, the company intends to increase its product offerings and production capacity of higher-margin, value-added products through the addition of lower-cost plants or the conversion of OSB plants from commodity structural panel production to OSB-based exterior siding products.
First quarter profits for Louisiana-Pacific were much stronger than expected. The turnaround was due to higher prices and volume for oriented strand board. We look for the housing rebound to continue, which should lead to increased demand for oriented strand board and siding and further earnings growth.
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These companies won't soar like other plays in the sector, but they make for great income sources.
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