LPX Presentation.ppt

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LPX Presentation.ppt

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

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