Louisiana-Pacific’s Siding Business Posts Impressive Q4 Results, but OSB Demand Continues to Fall

No-moat-rated Louisiana-Pacific LPX reported fourth-quarter results that were largely in line with our expectation as lower lumber prices and softening demand weighed on its financial performance. Net sales in the fourth quarter decreased 15% year over year, largely due to weakness in the firm’s oriented strand board, or OSB, business. That said, full-year 2022 revenue held up relatively well, declining only 2% due to strong demand and pricing in the first half of the year.

Louisiana Pacific’s siding business continued to perform well despite unfavorable housing dynamics, with segment revenue in the fourth quarter growing 37% year over year. The segment also posted a 580-basis-point increase in adjusted EBITDA margin to 22.8%. This was due to strong unit shipments (+20%) and pricing gains (+15%) made during the quarter. Louisiana-Pacific continues to invest in its siding business, spending almost $200 million in 2022 on capacity expansion. We think this is a prudent use of capital as the siding business has some of the firm’s most competitively advantaged products and offers solid growth prospects. That said, its fourth-quarter results were affected by the OSB business, which posted a 45% decrease in revenue year over year. The slowdown in housing starts adversely affected OSB shipments and pressured prices, as new residential construction accounts for the vast majority of Louisiana-Pacific’s OSB sales.

Louisiana-Pacific’s recently announced OSB curtailments should provide some price relief, but tempering housing demand will likely outpace the decrease in supply. We expect lumber and OSB prices to remain near current levels through the first half of the year due to a slowdown in new residential construction, but the firm’s stable siding business should offer some support during the year. We’ve decreased our fair value estimate to $52 from $58 per share due to lower near-term revenue growth and profitability in our forecast.