Louisiana-Pacific Earnings: Normalizing OSB Demand Continues To Constrain Results

No-moat-rated Louisiana-Pacific LPX reported lackluster second-quarter results as lumber markets faced persistent pressure amid a stagnant housing market. Net sales plunged 46% year over year as demand for wood products remained hampered across LP’s markets. While all four segments reported double-digit revenue declines in the quarter, LP’s oriented strand board, or OSB, business was hit the hardest as softening demand weighed heavily on selling prices. Louisiana-Pacific faces a difficult second half of the year as lumber prices remain well below pandemic-era highs and rising interest rates continue to constrain housing markets. Nevertheless, we maintain our $51 fair value estimate.

LP’s siding business fared best in the quarter given the weakness among its other segments, but revenue declined roughly 11% year over year. Siding volumes fell 16% due to a slowdown in new residential construction and stagnant existing home sales but prices were up 6% as previously announced pricing actions were realized. Even with the pricing gains, adjusted EBITDA margins for the segment declined 340 basis points to 18.4% due to raw material inflation and siding mill conversions during the quarter. Given the current housing environment, we expect the segment to see a high-single-digit revenue decline in 2023 as volume declines offset selling price increases.

The OSB business continued to struggle as housing market dynamics weighed heavily on prices. Net sales fell roughly 66% year over year due to significant declines in average selling prices (negative 57%) and a double-digit pullback in volume. That said, the recent uptick in new residential construction led to OSB price increases near the end of the second quarter that should flow through the third quarter as well. We anticipate average selling prices for OSB will improve moderately but volumes will remain pressured and far below those of 2022 through the end of the year despite marginal improvements in single-family new construction.