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LPX Presentation.ppt LPX Presentation.ppt Presentation Transcript

  • LOUISIANA-PACIFIC CORP (LPX) RESEARCH PRESENTATION November 7, 2002 Mark A. Hughes Portfolio Manager, Sloan IMC Educational Investment Trust Class of 2003
  • Personal Background
    • PM of the Sloan Educational Investment Trust
    • Prior to Sloan worked at investment bank in Seattle
    • Summer internship in high yield research at WR Huff Asset Management
    • Pursuing CFA
  • Methodology
    • SEC filings (10K, 10Q, 8K)
    • Earnings conference calls
    • Industry websites
    • The evil sell-side
    • Primary research
    • Financial modeling
    • Every analyst and buy-side shop has their own preferences
  • Industry Overview: Building Products
    • Innovation in building products???
    • Plywood vs. OSB
    • OSB for different uses
    • Engineered wood products: LVL and I-joists
    • Wood-related industries are highly correlated
  • S.O.B., it’s OSB!
  • Company Overview
    • North America’s largest manufacturer of OSB
    • Large holdings of timber and sawmills
    • Engineered wood products, siding
    • Dumping non-key assets:
      • Lumber assets and some mills
      • Plywood (traded to GP)
      • Particleboard, MDF
      • Distribution and trading
  • Competitive Environment
    • Three biggest competitors control 57% of the OSB market: LP, Weyerhaeuser, IP
    • Overcapacity has crushed OSB prices
    • Taking down of capacity
  • ST OSB Prices
  • LT OSB Prices
  • Customer Base
    • Two channels: new home builders and repair / renovate retailers
    • New housing starts strong: 1,843,000, 13% bigger than August and 16% greater than Sept 2001
    • Home Depot, Lowe’s, and Menards are holding up and report strong sales of LPX products
    • Weather can also be a factor (seasonality)
  • Comps
  • Capital Structure
  • Credit Snapshot
  • Stock Performance
  • Current Stock Valuation
    • Price = $7.65
    • 52-week range: $5.35 to $12.55
    • ’03 EPS = $0.44 / share
    • ’03 P/E = 17.4, in line with peers IP and WY
    • 2003 EV/EBITDA = 5.67x
  • Assumptions
    • Proforma Assumptions :
      • OSB Prices increase to $180 / 1,000 sq ft by 2004
      • Divestiture of $575 million of timber and other assets
      • Core operations reduced to OSB, EWP, siding
    • DCF Assumptions:
      • 5-year time horizon
      • 2% terminal value growth rate
      • Terminal value based on EV/EBITDA multiples
  • Equity Valuation
    • Competitors’ 2003 P/E: $ 7.75
    • Comp. Transaction EV/EBITDA (8x): $18.28
    • Historical EV/EBITDA (6.5x): $14.82
    • DCF (13% WACC, 7x EBITDA TV): $13.08
  • DCF Valuation
  • Sell-side sentiment
    • Some buy-side firms will totally ignore sell-side
    • General consensus is that sell-side analysts provide interesting bits of data, access to covered companies, and the trader’s perspective on the name
    • On LPX, sell-side is lukewarm due to bad industry conditions
  • Positives & Negatives
    • + ’s
    • Low-cost producer of OSB
    • Focus on key markets
    • Divesting bad assets
    • Will be virtually debt-free
    • Solid FCF generator
    • - ’s
    • Pure commodity business
    • OSB overcapacity
    • Depressed prices
    • Siding liability
    • Labor troubles in Canada
  • Big Issues
    • Completion of asset sales
    • Pricing & excess capacity
    • Continued health of housing sector
  • Final Recommendation
    • BUY: TARGET PRICE = $13
    • Proposed Trade = 400 shares @ $7.65
    • What will make the stock move
      • Upgrade from the sell-side
      • Successful asset sales
      • Debt repayments
      • Realization of cost reductions (through CAPEX)
      • Share buyback
      • Rebound in market will help depressed names