Inside Wall Street: Louisiana-Pacific As an Early Play on a Housing Recovery

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Gene Marcial's Inside Wall Street Louisiana-PacificIs it time to take a whack at forest-products companies? With the housing debacle still spooking Investors, shares in that sector continue to languish. But glimmers of a gradual housing recovery are popping up, so several investment pros have started cherry-picking among the group's potential long-term winners. One that has attracted some big players is Louisiana-Pacific (LPX), one of North America's largest forest-products companies.

Although Wall Street is still generally wary of the stock, it's one of the few housing-related shares that has sprung up with vigor since February. LPX has bolted from $7 a share in early February to a 52-week high of $10.79 on Apr. 13. For some very gutsy investors who bought just a year ago, when the stock had plunged to a 52-week low of $2.50, LPX was definitely a gigantic homerun.

Some hedge funds and long-term investors see the stock as just starting to snap back. True, as a major producer of wood products, LPX is directly dependent on the struggling residential housing market -- an area where many investors fear to tread. But strong demand for its major products has made them hot, say some bulls. LPX is a top maker of "oriented strand board" (OSB), wood siding panels and engineered wood products that are used primarily in building new homes, repairs and remodeling. OSB is made from wood strands arranged in layers that are bonded with resin.

A Surprising Rally

With U.S. housing starts starting to improve, if slowly, the price of OSB and other wood products has started to rise, not only because of mounting demand but due to lack of inventory. "The gradual housing market recovery and a consolidated industry should support pricing," says Paul C. Quinn, analyst at RBC Capital Markets, who rates LPX as overweight or a buy.

He estimates that the industry is running somewhat below 70% of its capacity. Idled plants aren't expected to restart until the level is past 90%, with a six-month lead time for starting up. That has pushed prices higher, Quinn says. Benchmark OSB has recently leaped "a heady 50% from the end of 2009," notes Quinn. (RBC has done banking for LPX.)

"The early-year rally [in OSB prices] has taken us -- and everyone else -- by surprise, coming as it does during a typically slow part of the year for homebuilding activity" says Quinn. So he has raised his full-year price forecast for OSB to$215 per thousand square feet from $185.

Another Homebuyer Tax Credit?

Government support has helped the gradual, if uneven, recovery in housing starts. He notes that new single-family housing starts rose some 4% in January and February. "While modest, it is progress, nonetheless, particularly given the very bad weather at the beginning of the year," says Quinn. Part of the rise was due to the government's homebuyer tax credit, which ends this month but could be extended a second time, says Quinn.

Part of the analyst's bullish stance on LPX, which posted losses in 2007, 2008 and 2009, is his expectation that it will be back in the black in 2010, with a slim fully adjusted profit of 8 cents a share. He forecasts earnings to jump to 44 cents in 2011. Many analysts expect LPX to be still in the red in 2010 but agree that it'll make money in 2011.

Analyst Stuart J. Benway of Standard & Poor's says LPX's stock is "compelling" and rates it a strong buy. He's encouraged by the housing recovery, noting that pending sales in February rose 8.2% from January, as reported by the National Association of Realtors.

A Minority of Bulls

S&P forecasts a 35% increase in housing starts in 2010, after a 38% plunge in 2009. Benway figures LPX revenues will recover by about 10% in 2010 to $1.05 billion, a big move after the 24% drop in 2009. He has narrowed his 2010 loss estimate to 20 cents a share from 25 cents to reflect rising OSB prices. For 2011, Benway forecasts earnings of 25 cents.

Eighteen analysts follow LPX, and only five recommend buying its shares. Apart from Benway, other bulls include Credit Suisse, which has a price target of $14 a share. Four analysts advocate dumping the stock, including those at Goldman Sachs, which has a depressed target price of $7 a share, and JPMorganChase, which has an even lower target of $5. Eight analysts are neutral.

Some major players have been big buyers, including Fidelity Management, the largest shareholder, with a 7.4% stake. It purchased nearly 2 million shares as of Dec. 31, 2009. The second-largest stakeholder is Dimensional Fund Advisers, with 5.3%, including the 860,878 shares it bought at year-end. The third-largest shareholder is BlackRock Institutional Advisers, with a 4.3% stake. It acquired 2.1 million shares as of Dec. 31, 2009.

Small investors have yet to warm up to housing stocks, but it could be a mistake to wait for the big rush when a recovery comes into fuller view. By then, it might be too late to capture any bonanza from housing.
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