Louisiana Pacific: An Update on Two Quarters of Earnings $LPX
Thanks to all who are reading this week! Feel free to reach out with feedback, especially criticism.
The core thesis for Louisiana Pacific, which I previously wrote about here, has three parts:
1) The company’s moving away from a low-margin, cyclical product (commodity OSB) that’s closely tied to housing starts and shifting towards a higher-margin, less cyclical product that commands some amount of pricing power (siding).
2) While siding is less tied to housing starts, it’s still used a lot to build homes, and so LPX should benefit from the housing shortage in the US.
3) It used its bumper OSB profits from 2020/21 to build out more siding capacity and buy back billions in shares, suggesting management takes a prudent approach to capital allocation.
The first two of these points looked potentially broken after the second quarter earnings call back in August. LPX’s stated goal was to have a less cyclical business, which is a good thing in principle. In practice, however, it meant becoming exposed to the overzealous shed building activity that occurred during lockdowns. When this shed activity finally slowed down, as it did in Q2, it dragged on results. Siding-volume dropped 16% YoY, in line with rather than above single-family housing starts. LPX no longer looked like a company selling into a diversified end market, but rather one that had tried and failed to escape its dependence on housing starts. To compound the misfortune, Louisiana-Pacific doesn’t have strong siding relationships with the national homebuilders, and so failed to benefit when DR Horton and Lennar had better than expected results through 2022/23. These national players spent the last year taking share from more regional competitors, making it look as though LPX management was right that housing would come in better than expected but wrong as to who would benefit. Point (3) became irrelevant, because a lack of excess cash meant LPX couldn’t execute significant buybacks anyway.
There was also an additional point of concern around how the company took product orders. In fiscal ‘23 Louisiana Pacific moved off a managed order file for siding that was instituted during Covid. Excess demand during the pandemic meant customers had to order 6-8 weeks in advance, and that LPX could determine who would get siding when. This came with the dual benefit of ensuring more important customers got what they ordered while also giving management greater revenue visibility at the time of an earnings call. Moving off a managed order file means customers receive orders in 2 weeks rather than 6-8, but also that providing revenue guidance is a harder task. This matters when deciding what a company should be valued at; all else being equal, a business with greater revenue visibility is worth more than one with less. A managed order file also meant that, as with Nvidia, customers were over-ordering in an attempt to get the amount they actually wanted. Unsurprisingly, this meant one of the reasons LPX management gave for missing Q2 guidance was put down to customers destocking now that they can get siding when they need it.
LPX’s third quarter earnings, reported a few weeks ago, cast the Q2 results in a better light. Single-family housing starts were down 16%, but siding volume was only down 6%, confirming that second quarter results were likely a result of customer destocking rather than some broader change in demand. Shed activity remained below 2021/22 levels, but normalized from the first half of ’23. Importantly, siding prices were up 8% YoY indicating that, unlike EVs, price cuts weren’t needed to stimulate demand. The company still has a weak spot in its relationships with national homebuilders, an area where James Hardie, a competitor, excels.1 Management has indicated this is an area of focus, but it’s unfortunately only become one this year.2 It’s unclear whether to fault them on this: It’s challenging to pitch a national company when you’re capacity constrained enough to need a managed order file, and doubly so when your competitor has exclusive multi-year contracts with these same companies. LPX could’ve built out additional siding capacity earlier to avoid this, but then one runs the risk of overestimating demand, something the company is loath to do after a less than ideal experience in ’08.
Disclaimer: The information in this post is not intended to be and does not constitute investment or financial advice. You should not make any decision based on the information presented without conducting independent due diligence.
In August, James Hardie announced an exclusive partnership with D.R. Horton for hard siding that can be found here.
This isn’t exactly correct. Selling siding to national contractors became a priority in 2019, but had to be put on hold given supply shortages during Covid.