Louisiana-Pacific (LPX)

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Louisiana-Pacific(NYSE: LPX): makes wood building materials. The company is the number one seller of Oriented Strand Boards - a wood-based construction material that is similar to, but less expensive than, plywood - in the United States.^[1] The company also sells siding, laminated lumber, and wooden panels that are used for the construction and repair of new homes. The company's sales are dependent on the US housing market. From 2006 to 2007, the number of housing starts fell by one third and the sale of new houses fell by 30%.^[2] Louisiana-Pacific's revenue has fallen by 33% from 2005 to 2007 primarily because of the shrinking housing market.^[3] LP's OSB segment has particularly shrunk from a $528 million profit in 2005 to $195 million loss in 2007.^[4]

For the next 20 years, Louisiana-Pacific has the rights to selectively harvest 42 million acres of timberland, which supplies 39% of its lumber needs.^[5] Because of the organic nature of wood, Louisiana-Pacific can slow down the harvest of the timber during periods of economic downturns and allow the trees to go larger and thus more valuable.^[6] Natural disasters can damage the supply of wood and raise prices of the raw materials, but they can also increase the demand for wooden construction materials to rebuild destroyed regions. After Hurricane Katrina in 2005, prices for wooden structural panels, which includes OSB, rose approximately 35%^[7] The rise in prices from the hurricane resulted in net sales of $2.5B, 19% higher than in 2003.^[8]

[edit] Business Overview

Revenue Breakdown by Segment from 2005 to 2007 ^[9]

Revenue Breakdown by Geography from 2005 to 2007 ^[10]

Louisiana-Pacific (LP) produces wood products through 4 different segments:

• OSB (49% of revenue, -124% of income): OSB (Oriented Strand Board) is used for decking, sidewall, and floors. The board is made of wood strands arranged in layers and is significantly cheaper and easier to produce than plywood. Since the mid-1990s, the overall sale of OSB has risen to replace plywood, and it now accounts for 62% of all structural panel consumption. LP's sale of OSB accounts for 23% of the OSB market and 14% of all structural panels in North America.^[1] OSB incurred a loss of $194.9 million in 2007, compared with a $528.4 million profit in 2005. The segment's fall in profit was primarily caused by a 57% fall in price of OSB from 2005 to 2007.^[11] The segment's costs of petroleum based products, used to make OSB, also rose.^[12]

• Siding (26% of revenue, 21% of income): Louisiana-Pacific makes standard siding and SmartSide, a product made from a similar process as OSB which is cheaper than normal siding and trim.^[13] Unlike the OSB segment, prices of siding rose by 4%, but total sales fell by 9% due to a lower volume of sales.^[14]

• Engineered Wood Products (19% of revenue, 7% of income): The segment makes I-joists and laminated veneer lumber (LVL) used in residential and commercial roofing and flooring.^[15] The segment has tried to lower costs by using wood strands instead of solid lumber for I-joists.^[16]

• Other Products (6% of revenue, -4% of income): The segment produces molding and it is involved in a joint-venture that makes cellulose insulation.^[17] Cellulose insulation is used instead of fiberglass insulation in construction and does not release hazardous fibers.^[18] The segment is also manages the 42 million acres of timberlands in Canada and the U.S. that the company has the right to harvest.^[19]

Louisiana-Pacific's over 42 million acres of timber makes up 39% of the company's yearly need for lumber. The company has the right to harvest the land under long-term contracts with the Canadian government and under private ownership of land. However, the average time remaining on the rights is 20 years. Louisiana-Pacific purchases its remaining needs, 61%, on the open market.^[5]

Because the OSB and siding that LP produces are commodity goods, the prices are determined by the market price. The rising price of lumber combined with the falling US housing market has caused Louisiana-Pacific's sales and income to fall from 2006 to 2007.^[20]

[edit] Trends and Forces

[edit] A fall in the housing market means a fall in sales

From 2005 to 2007, the sale of new homes fell by 30% and housing starts have fallen by one third from 2006 to 2007.^[2] Louisiana-Pacific's products are used primarily in the construction of new homes,^[21] and the company's net sales have fallen 33% from 2005 to 2007.^[22] In August 2008, Alan Greenspan, the former Chairman of the Federal Reserve, said that the housing slump was "nowhere near the bottom." ^[23] Louisiana-Pacific expects a continued decline in the housing market to further impeded its revenue.^{[citation needed]}

[edit] Natural risks have a mixed benefit for Louisiana-Pacific's revenue

There are over 80 alien pests and insects that destroy over 400,000 hectares of forest in Canada each year. This is nearly half the amount of wood that is harvested each year in Canada.^[24] In British Columbia, where much of LP's timberland is located, $4.2 billion worth of timber were destroyed by beetles alone as of 2007.^[25] Other natural disasters often spike demand for the wood products that Louisiana-Pacific supplies. The prices of structural wooden panels rose approximately 35% after Hurricane Katrina.^[7]

[edit] Environmental legislation threatens LP's revenue

Environmental conservation groups often criticize the timber industry, claiming that its logging practices are harmful to forests. These groups lobby for increased legislation governing the actions of timber companies and protecting certain areas of forest lands. Existing Environmental legislation also puts pressure on Louisiana-Pacific. In 2007, the company had to pay $1 million in fines for over logging past sites ^[26] and $7.8 million for environmental litigation over current practices.^[27] Louisiana-Pacific is involved in litigation which could result in future costs. In 2006, LP was involved in 19 separate lawsuits representing 1,429 plaintiffs claiming to have received personal injury from working in one of LP's wood treatment facilities.^[3] These cases have not been settled, but have the possibility of resulting in elevated costs.

[edit] Competition

Louisiana-Pacific competes against a number of logging companies, sawmills, and wooden construction supplies companies. Unlike many of its competitors, LP specializes in particle and strand boards, such as OSB, which are cheaper than solid lumber materials. Louisiana-Pacific competes most closely with the following companies:

• Weyerhaeuser Company (WY): Weyerhaeuser competes with LP for OSB panels, trim, and cellulose fibers. Unlike Louisiana-Pacific, Weyerhaeuser is not as heavily involved in OSB and it develops real estate.^[28]
• Universal Forest Products (UFPI): Universal Forest makes structural wood panels, siding, and slates for pallets which compete with Louisiana-Pacific's products. Universal Forest however, does not produce strand based products like LP, instead it uses solid lumber.^[29]
• Deltic Timber (DEL): Deltic Timber grows and harvests land on 438,600 acres of privately owned which competes against the timberlands of LP's Other Products segment. Deltic Timber also runs a sawmill operation that competes against Louisiana-Pacific, but it is mostly involved with harvesting timber.^[30]
• Rayonier Inc. REIT (RYN): Rayonier competes with LP's Other Products segment for timber and cellulose fibers.^[31] Unlike Louisiana-Pacific which has temporary rights over land, Rayonier completely owns and manages 2.5 million acres of land which it uses for timber and real estate development.^[32]

[edit] References

1. ↑ ^{1.0 1.1} LPX 2008 10-K "OSB" p.4
2. ↑ ^{2.0 2.1} Federal Reserve - Board of Governors of the Federal Reserve System: "The Housing Market and Subprime Lending"
3. ↑ ^{3.0 3.1 3.2} LPX 2008 10-K "Consolidated Statements of Income" p.46
4. ↑ LPX 2008 10-K Item 6 "OSB" p.27
5. ↑ ^{5.0 5.1} LPX 2008 10-K "Raw Materials" p.6
6. ↑ Seeking Alpha "Adding Wood to Your Portfolio: A Worthwhile Investment" 6 July 2008
7. ↑ ^{7.0 7.1} BNet "Katrina brings rise in construction materials costs" 21 Sept 2005
8. ↑ LPX 2008 10-K Item 6 "Selected Financial Data" p.19
9. ↑ LPX 2008 10-K "Segment Information" p.92
10. ↑ LPX 2008 10-K "Segment Information" p.94
11. ↑ LPX 2008 10-K "OSB" p.27
12. ↑ LPX 2008 10-K "OSB" p.28
13. ↑ LPX 2008 10-K "Siding" p.4
14. ↑ LPX 2008 10-K "Siding" p.28-29
15. ↑ LPX 2008 10-K "Engineered Wood Products" p.5
16. ↑ LPX 2008 10-K "Engineered Wood Products" p.29
17. ↑ LPX 2008 10-K "Other Products" p.5
18. ↑ Ask the Builder "Cellulose vs. Fiberglass" Nov 2007
19. ↑ LPX 2008 10-K "Canadian Timberland and License Agreements" p.14
20. ↑ LPX 2008 10-K "Factors Affecting Our Results" p.22
21. ↑ LPX 2008 10-K "Engineered Wood Products" p.29
22. ↑ LPX 2008 10-K "Selected Financial Data" p.19
23. ↑ The Sun: "Greenspan: Housing Slump Is 'Nowhere Near the Bottom'"
24. ↑ Forest Invasive Alien Species "About Forest Invasive Species (FIAS)" 22 August 2008
25. ↑ Realty Times "Beetles, Trade Dispute Drive Up Lumber Costs" 28 August 2008
26. ↑ LPX 2008 10-K "Discontinued Operations" p.33
27. ↑ LPX 2008 10-K "Other Operating Credits and Charges, Net" p.80
28. ↑ Reuters Business & Finance "Weyerhaeuser Co"
29. ↑ Google Finance "Universal Forest Products, Inc"
30. ↑ Google Finance "Deltic Timber Corporation"
31. ↑ Google Finance: Rayonier Inc
32. ↑ RYN 2006 10-K, p.2