Riding The Wave Of Siding Growth Through Smart Investments And Strategic Margins

Key Takeaways

• Continued investment in Siding capacity and price increases are expected to enhance revenue and margin growth, improving long-term earnings.
  
• A strong balance sheet and share repurchases support sustained earnings growth, with potential EPS improvement from a reduced share count.
  
• Over-reliance on single-family starts, commodity price fluctuations, and supply chain risks threaten revenue growth and net margins amid macroeconomic challenges.

Catalysts

Provides building solutions primarily for use in new home construction, repair and remodeling, and outdoor structure markets.

• Siding net sales grew by 22% and the company expects ongoing growth and margin expansion in this segment, which should positively impact revenue and earnings.
  
• The expectation for a positive turnaround in the repair and remodeling market in 2025 presents a potential catalyst for increased SmartSide Siding sales, which should benefit revenue.
  
• The announcement of a price increase for Siding in the next year suggests potential revenue and margin growth as price realization could improve the company's overall earnings profile.
  
• Investments in new Siding capacity, with significant CapEx allocated for the next two years, could drive long-term volume growth and translate into higher future revenues and earnings.
  
• LP's strong balance sheet and continued share repurchases support sustained earnings growth and potentially higher EPS due to a reduced share count.

Louisiana-Pacific Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Louisiana-Pacific's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.3% today to 13.9% in 3 years time.
• Analysts expect earnings to reach $469.7 million (and earnings per share of $6.81) by about November 2027, up from $417.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $366 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.0x on those 2027 earnings, up from 18.8x today. This future PE is lower than the current PE for the US Forestry industry at 24.6x.
• Analysts expect the number of shares outstanding to decline by 0.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.23%, as per the Simply Wall St company report.

Louisiana-Pacific Future Earnings Per Share Growth

Risks

• The slowing new home construction market, due to rising mortgage rates and approaching colder weather, presents a risk to revenue growth, given LP's over-reliance on single-family starts.
  
• Lower commodity OSB prices negatively impacted revenue by $88 million, suggesting vulnerability in net margins due to market price fluctuations in OSB.
  
• The delay from the East Coast port strike, causing a shift in maintenance costs and production schedules, demonstrates supply chain risks that could impact earnings consistency.
  
• Rising interest rates and affordability are key factors to watch, as they pose macroeconomic challenges that could impede revenue growth and net earnings.
  
• The significant capital expenditure planned for expanded Siding capacity, while aimed at growth, carries risk if market demand doesn't meet expectations, potentially affecting cash flow and net margins.

Valuation

• The analysts have a consensus price target of $109.0 for Louisiana-Pacific 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 $136.0, and the most bearish reporting a price target of just $67.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.4 billion, earnings will come to $469.7 million, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 8.2%.
• Given the current share price of $111.66, the analyst's price target of $109.0 is 2.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.