Oakdale Modernization And Hondo Facility Expansion Will Increase Efficiency

Key Takeaways

• Modernizing the Oakdale facility and strategic investments are expected to enhance production efficiency and support future revenue growth.
  
• Strong shareholder return strategies and housing market demand support a positive long-term earnings outlook.
  
• Declines in housing starts and macroeconomic pressures are impacting sales, margins, and profitability, while competition and facility costs further strain Boise Cascade's earnings.

Catalysts

Engages in manufacture and sale of engineered wood products (EWP) and plywood, and wholesale distribution of building materials in the United States and Canada.

• The ongoing modernization and planned outage at the Oakdale facility is expected to be completed by the end of the second quarter of 2025, which could lead to increased efficiency and production capacity, positively impacting earnings.
  
• The partial reintegration and operational improvements at the Oakdale mill are anticipated to contribute to growth in the EWP franchise, likely bolstering future revenues as demand conditions stabilize.
  
• The strategic investments in EWP production capabilities in the Southeast and the new distribution facility in Hondo, Texas, are set to provide organic growth opportunities, potentially increasing revenue and margins over time.
  
• Despite short-term challenges, there remains a constructive long-term demand outlook for residential construction due to factors like undersupply in the housing market and aging U.S. housing stock, which may positively impact future sales and earnings.
  
• The company's commitment to shareholder returns, including share repurchases and dividends, alongside a strong balance sheet, positions it for improved future EPS, as share buybacks reduce the number of outstanding shares.

Boise Cascade Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Boise Cascade's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 5.0% in 3 years time.
• Analysts expect earnings to reach $364.9 million (and earnings per share of $9.74) by about May 2028, up from $312.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $323.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, up from 10.5x today. This future PE is lower than the current PE for the US Trade Distributors industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 4.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Boise Cascade Future Earnings Per Share Growth

Risks

• Decreased U.S. housing starts and single-family starts led to a decline in Boise Cascade's consolidated sales by 7%, potentially affecting future revenue and net income.
  
• Pricing pressure and competition in the engineered wood products (EWP) market are expected to persist, which could further impact Boise Cascade's margins and earnings.
  
• The planned outage and modernization efforts at the Oakdale facility negatively impacted financial results by $8 million sequentially, and ongoing capital expenditures might strain cash flow in the near term.
  
• Lower sales volumes in both the Wood Products and Building Materials Distribution segments resulted in decreased segment EBITDA and gross margins, impacting overall profitability.
  
• Macroeconomic uncertainties such as elevated mortgage rates and economic volatility are dampening consumer and builder confidence, which could further limit revenue growth and impact earnings.

Valuation

• The analysts have a consensus price target of $118.833 for Boise Cascade based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $135.0, and the most bearish reporting a price target of just $103.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.3 billion, earnings will come to $364.9 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $87.48, the analyst price target of $118.83 is 26.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.