Housing Downturn And Cost Pressures Threaten To Drag Down Wood Product Firm's Profitability

Key Takeaways

• Anticipated revenue growth challenges due to declining U.S. housing starts and a tough demand environment in both Wood Products and housing sectors.
  
• Increased capital expenditures on growth projects present risks to short-term cash flow and earnings amidst uncertain demand and pricing power in the Engineered Wood Products segment.
  
• Boise Cascade's focus on organic growth and shareholder returns, alongside strategic investments in facilities, positions the company for sustained revenue and operational efficiency amidst a challenging housing market environment.

Catalysts

Engages in manufacture of wood products and distribution of building materials in the United States and Canada.

• The decline in total U.S. housing starts by 7%, influenced by lower multifamily starts, is expected to pressure future demand for Boise Cascade's products, potentially impacting revenue growth in the housing sector.
  
• Decreased sales of Wood Products and an overall consolidated sales decrease by 1% from the previous year indicate a challenging demand environment, which could lead to continued revenue pressure if the housing market and economic conditions do not improve.
  
• Higher wood fiber and conversion costs contributed to a decrease in Wood Products segment EBITDA, highlighting cost pressures that could negatively impact future net margins and profitability if these costs continue to rise or cannot be effectively managed.
  
• The company's expectation of mid- to high single-digit sequential volume declines in Engineered Wood Products (EWP), coupled with low single-digit sequential price declines, suggests a weakening demand and pricing power that could further challenge revenue and margin performance in the EWP segment.
  
• The anticipated acceleration in capital expenditures, with a significant portion of the investments aimed at growth projects, indicates an increase in spending that could pose risks to short-term cash flow and earnings if the projected growth benefits do not materialize as expected due to the currently tepid demand environment.

Assumptions

• Analysts are assuming Boise Cascade's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.6% today to 5.4% in 3 years time.
• Analysts expect earnings to reach $407.1 million (and earnings per share of $11.09) by about September 2027, down from $457.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $463.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2027 earnings, up from 10.6x today. This future PE is greater than the current PE for the US Trade Distributors industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 1.69% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.92%, as per the Simply Wall St company report.

Risks

• The resilience in single-family home starts, despite an overall decrease in total U.S. housing starts, suggests a potential for steady or growing demand for Boise Cascade's engineered wood products and building materials, which could positively affect sales volumes and revenue.
  
• Boise Cascade's strategic focus on growth through organic projects and returning capital to shareholders indicates strong financial health and a commitment to enhancing shareholder value, potentially leading to improved earnings and net margins.
  
• The company's ability to maintain flat gross margin dollars in a challenging environment, especially within its Building Materials Distribution (BMD) segment, demonstrates cost management and pricing strategy effectiveness, possibly protecting net margins.
  
• Investments in modernization and expansion, like the significant upgrade of the Oakdale facility and the new distribution facility in Hondo, Texas, position Boise Cascade for future growth in production capacity and market reach, likely supporting revenue growth and operational efficiency.
  
• The current industry forecast for 2024 U.S. housing starts being slightly below 2023 levels combined with low unemployment and an undersupplied existing housing stock suggests sustained demand for new residential construction, which could result in continued demand for Boise Cascade's products, supporting revenue and earnings.

Valuation

• The analysts have a consensus price target of $138.2 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 $155.0, and the most bearish reporting a price target of just $120.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.5 billion, earnings will come to $407.1 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 6.9%.
• Given the current share price of $124.13, the analyst's price target of $138.2 is 10.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.