Why Louisiana-Pacific Will Likely Pull Back

Why Louisiana-Pacific Will Likely Pull Back

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Louisiana-Pacific slipped 2% in early Wednesday trading after TD Securities downgraded the building-products company from hold, to reduce.

So what: Along with the downgrade, analyst Sean Steuart lowered his price target to $16 (from $16.50), representing about 8% worth of downside to yesterday's close. Louisiana-Pacific shares have rallied nicely ever since announcing the purchase of Ainsworth Lumber in early September, but Steuart believes that the valuation is a bit rich at the current levels.

Now what: TD is now targeting an EV/EBTIDA multiple of 6.6 on the shares, down from its prior view of 6.9. "We believe that LP's valuation is discounting an expectation of exceptional free cash flow over the mid-term; we expect rising average OSB prices over the next year, but are less optimistic than others on the company's free cash flow prospects," noted TD. When you couple that recent investor enthusiasm with the volatile long-term nature of the building products space, I'd agree that Louisiana-Pacific's risk/reward doesn't look too appealing.

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Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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