Preview: Louisiana-Pacific Lacks Post-Sandy Momentum

LPX ChartLPX data by YCharts
NEW YORK (TheStreet) -- Which way will Louisiana-Pacific (LPX) go? The stock is down 20% over the past several weeks, down 6% on the year. However, several weeks ago, shares reached a new 52-week high of $22.55. Now heading into the company's first-quarter earnings report on Tuesday, it seems investors are expecting the worst. Otherwise, why else would the stock be down 20% in a matter of weeks?

Is the 'Sandy Effect' Over?

Despite LPX's ups and downs, the stock's not cheap -- sporting a P/E that is 3 times that of rival Weyerhaeuser ( WY). However, given LP's recent stock movement and the fact that the company is so closely tied to the housing recovery, it's anyone's guess where the shares are heading next.

There are two frames of thought here, one being on the company and the other being on the overall housing recovery. In terms of LPX, it's more of a cautious tenor, which (in my opinion) was spurred by management's own words. That's why investors have decided to take profits ahead of the first-quarter earnings report.

At the same time, the long-term direction of the overall industry is still positive, which is why the stock, by virtue of its high P/E, is being valued higher than the S&P 500. Of the 13 analysts covering the stock, the consensus estimate is 45 cents per share, while revenue is expected to come in $558 million. Management, however, offered no specific guidance during the fourth-quarter report, other than to say that it will tread cautiously. LPX has a P/E of 92 vs. WY's P/E of 34.



TheStreet's Jim Cramer correctly predicted Louisiana-Pacific's initial stock surge, while citing Hurricane Sandy as a likely catalyst. When Cramer made his bullish call last November, LP was trading at around $14.72. And given that the stock soared to $22.55 in March, representing gains of 53%, it seems that LP has peaked. Meanwhile, Weyerhaeuser, which was also on Cramer's bullish list, has posted gains of 23% and is still up 11% on the year.

Whether the "Sandy Effect" is still in play, depends on what metric you use. For Weyerhaeuser, the debate is certainly up in the air, especially since the company is still posting 30% revenue growth. For Louisiana-Pacific, though, I'm inclined to believe that the "Sandy Effect" is over -- at least the Street seems to think so, even though the stock is being priced with the anticipated housing recovery.

With first-quarter earnings on tap, management's main objective should be to rebuild and strengthen a seemingly fragile base of investors.

Expectations for the Quarter

Despite the fact that LP is coming off a strong fourth quarter, during which revenue rose a year-over-year 47% on the strength of the housing recovery, management didn't seem too confident that this level of performance was sustainable. Guidance was overly cautious, if not filled with complete terror that there would be an imminent reversal in the consensus housing forecasts.

During the fourth-quarter conference call in February, Louisiana-Pacific's CEO, Curtis Stevens, first spoke favorably about the housing recovery:
"The current consensus for housing forecast stands at about 990,000 for 2013 and right at 1.2 million (starts) for 2014. New-home inventory remains very, very low, at about 125,000 and that includes both completed homes for sale and homes under construction. And then existing home inventory is down 23% compared to the same time last year. And home prices are on the rise and mortgage rates are low, so I'm confident that the momentum that we have seen recently in housing starts will continue as pent-up demand is very large. ..."


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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