Why is Louisiana-Pacific (LPX) rallying amidst inflation woes? – November 25, 2022

Louisiana-Pacific Corporation (LPX Free Report) or LP stocks have rallied recently on efforts to increase siding product penetration in repairs/remodels and launch SmartSide products. His efforts in strategic business transformation, effective cash management and inorganic actions are other positives.

The entire construction and related industries are struggling with significant inflationary pressures and labor shortages. Nonetheless, strong demand for SmartSide cladding, particularly in repair and remodeling applications, and expansion in various markets bodes well.

Over the past three months, the company’s shares are up 13.4%, while Zacks Building Products – Wood Industry is down 6.3%.

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Let’s discuss the factors affecting the performance of this leading manufacturer of sustainable, high-quality wood building materials, structural framing products and exterior siding.

Important growth drivers

Solid Siding’s business prospects are looking good: LP increased the penetration of siding products in repairs/remodels and introduced SmartSide products. It exited the fiber product line to focus on higher-margin SmartSide strand products. The company also introduced ExpertFinish within the Prefinish product line.

Louisiana-Pacific is experiencing significant supply chain issues and inflationary pressures, particularly in materials and labor. Nevertheless, the demand for Smooth SmartSide and ExpertFinish is higher than expected. The siding unit posted 22% revenue growth in the first nine months of 2022.

Siding Solutions (formerly known as SmartSide) revenue grew 23% year over year for the same period. The increase was mainly due to robust demand for its products. Unit shipments rose 8% in the first nine months of 2022 on a 14% increase in selling prices.

The Company recently announced the expansion of siding capacity with the restart of production at Peace Valley.

Strategic business translation: LP is gradually transforming from a commodity producer to a more stable cash-generating company by increasing revenue and EBITDA mix. It has focused on three areas: increasing factory efficiency by improving productivity, uptime and quality through overall equipment effectiveness or OEE initiatives, applying best practices to the supply chain, and optimizing infrastructure costs.

The company improves its business by expanding the siding unit and reducing costs. In the past three years, EBITDA in the Siding segment has doubled at a CAGR of 25%.

Although the recent quarters show a significant decline in gross margin and Adjusted EBITDA due to the above factors, the long-term investments in various markets and business areas bode well.

Impressive shareholder return: Amid the prevailing macroeconomic woes and the housing market slowdown, while most companies maintain their cost-cutting policies, LP has consistently increased shareholder returns through share buybacks and dividends. During the first nine months of 2022, the company paid $53 million in dividends and $900 million in share repurchases. LPX is committed to returning at least 50% of cash flow from operations to shareholders in excess of capital expenditures to maintain core business and grow siding and value-added OSB.

Zack’s Rank & Key Picks

LPX currently carries a Zacks rank #3 (hold). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better ranked stocks that warrant a look at the same Zacks construction sector are among others Atlas Technical Advisors, Inc. (ATCX free report) Altair Engineering Inc. (ALTR Free report) and EMCOR Group Inc. (EME Free Report) , each carrying Zacks Rank #2 (Buy).

Atlas Technical, an Austin, TX based company, provides professional testing, inspection, engineering, environmental and program management and consulting services throughout the United States. The company’s record inventory and robust pipeline of new orders reflect the company’s prospects. ATCX has grown to become one of the largest providers of mission-critical engineering services to the infrastructure and environmental markets in the United States.

ATCX’s expected earnings growth rate for 2023 is 76.9%.

Altair Engineering provides software and cloud solutions in the fields of simulation, high-performance computing, data analysis and artificial intelligence worldwide.

ALTR’s expected earnings growth rate for 2023 is 21.5%.

Headquartered in Norwalk, CT, EMCOR provides electrical and mechanical construction and plant services throughout the United States. EMCOR benefited from solid execution in the US construction segment – which includes US mechanical and electrical construction units – as well as disciplined cost control. Additionally, value-added acquisitions have strengthened the bottom line by adding new markets, opportunities and capabilities.

EMCOR is expected to grow by 10.2% and 17% in 2022 and 2023, respectively.