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Preview: Louisiana-Pacific Lacks Post-Sandy Momentum

Stocks in this article: LPX WY

Those were certainly encouraging words and would suggest that the company would have followed it with a better-than-expected outlook, especially since LP had just completed a quarter where revenue surged 47% year over year. But that was not the case, as Stevens released this gloomy outlook:

"While I firmly believe there will be demand at this higher level, we will take a more conservative tack as we plan our business operations. There are several factors that could slow the positive momentum that include: The turmoil in Washington, D.C. related to the fiscal cliff; the debt ceilings; the sequestration; spending authorization to keep the government working; and budgets. All this had a negative impact on job growth and GDP, with Q4 coming in slightly negative and consumer confidence."
It seems Stevens, like many, believes job growth and GDP will impact home sales. Perhaps he has reason not to buy into the idea that the industry's 990,000 housing-start forecast is solid. Besides, this figure varies among housing-start forecasters: As of March, it was at 985,000 from VAR-3, 922,000 from Arima and 934,000 from ES.

The concerns that Stevens cited were valid. However, there have also been plenty of developments and/or resolutions to each of his concerns. Management was also uneasy about credit availability, which would adversely impact land acquisitions, land developments, as well as mortgage lending. Essentially, management decided to guide against the 990,000 consensus estimate for housing forecasts, stating that the "prudent course of action is to be ready for a slightly lower number."

Management stopped short of saying what that slightly "lower number" for housing starts would be. Accordingly, investors punished the stock with profit-taking, moving on to (among others) Weyerhaeuser, which had a more optimistic first-quarter outlook. As for expectations for LP's first-quarter report, investors are left guessing -- and watching the unpredictable direction of its stock. In these wonky situations, comparing the relative performance of its peers is appropriate.

Weyerhaeuser just posted strong first-quarter results, which included revenue growth of 31%, following 25% revenue growth in the fourth quarter. Louisiana-Pacific should (at least) post revenue growth in the mid-to-high 40% area. Relative to Weyerhaeuser, anything less than 40% sales growth would be a disappointment.


Profitability, however, is a different animal, given that companies don't often share the same focus in terms of margins and expenses. That said, both LP and Weyerhaeuser have posted identical fourth-quarter margins of 21%, which arrived flat for Weyerhaeuser in the first quarter. Essentially, if LP's margins arrive below 21%, the stock will likely get hammered and deservedly so, given management's vague prediction of a "lower number" when referencing housing start.

Bottom Line

It certainly does appear that the housing recovery is coming back to life. Unfortunately for current LP investors, the stock lacks the strong foundation that has built its business. However, given that the general consensus expects housing to remain on a positive trajectory, the long-term prospects for Louisiana-Pacific should remain favorable. Meanwhile, though, management has to rebuild the confidence of its investors, which is now on shaky ground. First-quarter results and better guidance will be a great start.

At the time of publication, the author held no position in any of the stocks mentioned.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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