Louisiana-Pacific

We will discontinue analyst coverage of Louisiana-Pacific on or about Nov. 12.

We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing. We will discontinue analyst coverage of Louisiana-Pacific on or about Nov. 12.

We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

We've decreased our fair value estimate to $70 from $71 due to lower near-term results in the OSB business that were somewhat offset by an increase in our siding solutions forecast. We see solid growth and profitability for Louisiana-Pacific over our 10-year forecast horizon, with consolidated sales growing at a 4.3% compound annual rate and operating margins averaging roughly 18.5% (compared with the 18.2% 10-year average). Operating margins expanded significantly in 2021 and 2022 due to record high lumber prices and strong demand for the firm's engineered wood siding products. We see operating margins normalizing over our forecast as lumber prices pull back from record highs and siding demand normalizes due to a slowdown in housing markets and repair and remodel activity.

Louisiana-Pacific’s OSB segment reported strong sales and profitability in 2022 due to robust prices amid tight lumber supply and strong demand but saw sales tumble in 2023 as higher interest rates weighed on housing markets. Almost all of Louisiana-Pacific’s OSB sales are for new construction, which experienced robust demand over the last few years, but saw significant declines in 2023. A recovery in prices drove OSB sales higher despite some volume headwinds during the year. Demand and pricing recovered in 2024, but previously announced capacity has come online and pressured pricing recently. We expect OSB pricing will be lower in 2025 amid ample industry supply while volumes are pressured by mixed end market demand. Nevertheless, single-family housing and general construction projects rely heavily on OSB, and we do not think this will change in the foreseeable future. We expect OSB will continue to take market share from plywood, which should provide a tailwind for volume growth. We forecast revenue will increase at a roughly 0.6% compound annual rate over our 10-year forecast following a signifcant decline in 2025 due to lower selling prices.

In the company’s siding business, we expect solid growth over our forecast as SmartSide continues to take share from traditional siding products. The current engineered wood siding market in the US is estimated to be around $1 billion, which pales in comparison with the total siding market. Louisiana-Pacific’s engineered wood siding offers durability and strong eye appeal for a low price, making it an increasingly popular option for homebuilders. As Louisiana-Pacific grows its siding business, it becomes more likely that competitors will produce their own engineered wood siding. While it is unlikely the firm could lose its market share position in the near term, Louisiana-Pacific faces the constant threat of new entrants in the engineered wood siding market. Over our 10-year forecast, we expect revenue in the siding solutions segment to grow at a 6.7% compound annual rate as Louisiana-Pacific wins market share from traditional siding products.

Although Louisiana-Pacific is one of the largest makers of wood products in North America, we do not think it benefits from an economic moat. The North American wood products market is extremely competitive, with numerous players producing industry standard products with little room for differentiation. Louisiana-Pacific is a sizable participant in this market, mainly producing oriented strand board and engineered wood siding for homebuilding and repair and remodel end markets. The company's commodity business, OSB, can be immensely profitable when demand is strong, but margins crumble during times of weak demand as Louisiana-Pacific’s OSB operations possess no structural competitive advantages, in our view. Its siding solutions business produces engineered wood siding under its SmartSide brand. Louisiana-Pacific is able to exert pricing power and earn consistent returns in its siding business from its strong brand and differentiated products. That said, the siding business does not represent a large enough portion of Louisiana-Pacific’s revenue and profits to enable it to consistently outearn its cost of capital. For this reason, we do not believe the company has an economic moat.

Oriented strand board accounts for over a third of Louisiana-Pacific’s sales. Engineered wood products, specifically OSB, are mainly used in new construction and repair and remodel projects. In traditional single- and multi-family housing, OSB is used as wall sheathing and roof cover. OSB sheathing typically covers the frame of the structure and provides significant strength. Since OSB is unfinished, it typically is covered by roof shingles and exterior siding. OSB is manufactured by dicing low-quality softwood timber into thin strands, adding resin, stacking them 8-10 inches high, and then adding heated pressure to create a strong wood composite. While OSB and plywood serve many of the same uses in construction projects, OSB has continued to take share as it offers comparable attributes at a lower price.

Louisiana-Pacific manufacturers OSB using standard processes that usually involve applying adhesives to uniform feedstock under pressure and heat. While these products are less commoditized than 2x4s and other dimensional lumber products, OSB is not proprietary to Louisiana-Pacific. Many competitors produce a variety of engineered wood products using similar processes that compete directly with Louisiana-Pacific. The processes are relativity simple, and competitors have ample access identical feedstock. OSB can be immensely profitable during times of strong market demand and tight industry supply, such as the pandemic-era housing boom. The excess cash generated during these times quickly leads to brownfield or greenfield expansion, which increases supply and lowers prices. Lower prices tighten margins and inhibit Louisiana-Pacific’s ability to earn returns above its cost of capital for a prolonged period.

A majority of OSB produced by Louisiana-Pacific is undifferentiated and is sold as a commodity. Building a moat in a commodity business typically necessitates a low-cost production position or a transportation cost advantage—something Louisiana-Pacific, along with its North American peers, fundamentally lacks. While some producers of commoditized products can benefit from a cost advantage that supports an economic moat, we don’t think that Louisiana-Pacific and its North American competitors experience similar advantages. There are many sizable players in the wood products industry that purchase timber at market prices, which leaves little room for volume discounts or other incentives. The process to manufacture OSB is similar across competitors, and any advancements are quickly adopted by other players. This negates a cost advantage that OSB producers could possess through production improvements. Some commodity producers derive an economic moat due to the low value/weight ratio of their product. It can be unprofitable to transport those products over long distances, so local players have a strong competitive advantage over distant competitors. Once the OSB is manufactured, its value/weight ratio is higher than raw timber and it can be compactly loaded for transportation. This removes a transportation cost advantage that the company might be able to generate from the locations of its OSB mills because competitors have access to low-cost shipping to customers.

Louisiana-Pacific’s siding solutions business produces a variety of engineered wood siding products that are used in new single-family residential construction, repair and remodel projects, and other outdoor structures like sheds. It accounted for more than 50% of sales in 2023 as the company increased focus on its repair and remodel business in recent years. The firm's repair and remodel exposure provides some protection from fluctuations in housing demand and changes in the economic cycle. In recent years, the firm’s siding business has commanded higher returns that its OSB segment as it has shifted its focus to value-added and premium products. Louisiana-Pacific provides a somewhat differentiated product to a growing market where it’s the largest and most recognized supplier. In the engineered wood siding industry, there are few competitors, and none have the reach or brand power of Louisiana-Pacific. We assign Louisiana-Pacific’s siding segment a narrow economic moat as its pricing power should support excess returns for at least the next 10 years.

Engineered wood siding has grown in popularity in recent years as an alternative for higher-priced traditional wood siding. Unlike its wood siding counterpart, engineered wood siding offers the appearance and durability of wood at a lower cost. Engineered wood siding is generally less expensive to purchase, install, and maintain than traditional wood siding, making it an attractive option for homebuilders and homeowners. Its low-cost nature, durability, and natural appearance have made the product increasingly popular for homes and outdoor structures.

Louisiana-Pacific’s SmartSide brand is one of the most the well-known and utilized engineered wood siding products on the market. While many companies produce exterior siding and trim, only a few produce engineered wood siding. Many competitors specialize in a particular type of siding, which could include vinyl, brick, fiber cement, stucco, and traditional wood. Competitors have also been dissuaded from creating engineered wood siding due to the relatively small size of the market. The engineered wood siding market in the US is estimated to be around $1 billion, which pales in comparison with the total siding market. Louisiana-Pacific has spent years growing the engineered wood siding market with its SmartSide products and has faced little resistance from siding incumbents. While Louisiana-Pacific likely benefits from a first-mover advantage, it remains to be seen if it can hold its position, given the growing popularity of engineered wood siding. Producing engineered wood siding is not complex and can likely be replicated by most competitors. As the market continues to grow in North America, competitors will be increasingly incentivized to produce their own engineered wood siding.

Robust demand for SmartSide has supported consistent price increases through economic cycles and led to subsequent margin expansion for Louisiana-Pacific. From 2007 to 2021, price increases in the firm’s siding solutions business exceeded inflation in all but five years. Additionally, Louisiana-Pacific did not record a single year price contraction during this 15-year period. In our view, this is a testament to the firms’ durable pricing power in its siding business, even during times of softer demand. That said, pricing power is constrained to a degree due to the availability of viable alternatives. SmartSide faces constant pressure from viable substitutes. These include brick, stucco, fiber cement, and vinyl. While some materials are sold at a higher prices, vinyl and stucco tend to be priced comparably with engineered wood.

The company has operations in South America, where it produces structural OSB and siding products. Its South America business accounts for approximately 6% of revenue. Louisiana-Pacific operates manufacturing facilities in Chile and Brazil but sells its products across the continent and to select export markets. This business offers Louisiana-Pacific international exposure and reduces its reliance on the North America construction market. Competitive dynamics in South America are similar to those in North America, where Louisiana-Pacific sells a commoditized product with little pricing power. This limits the ability to outearn its cost of capital in the region over a prolonged period.

A continued shift from plywood to OSB in single-family housing should provide a strong tailwind for Louisiana-Pacific’s sizable OSB business.

Louisiana-Pacific is well positioned to benefit from continued growth of engineered wood siding at the expense of vinyl, brick, stone, and stucco.

The sale of the engineered wood products business will enable margin expansion as the firm focuses on its higher-value products.

Louisiana-Pacific’s reliance on OSB profitability could put the firm at risk during times of economic weakness.

The engineered wood siding market has grown rapidly in recent years, but Louisiana-Pacific will struggle to take additional share from traditional siding materials going forward.

US homebuyers could continue a shift toward multifamily units rather than single family, causing OSB and siding demand to decline.