Tickers in this Article: LPX, WY, UFPI, RYN, PCL. PCH
Several years after the rupture of the housing market, there is still no joy among the companies that supply building materials. True, many product markets have stabilized, but investors rarely get very excited about "less worse". As a leading supplier of an increasingly popular building material, Louisiana-Pacific (NYSE: LPX) should see a very strong rebound in margins and stock performance when homebuilding picks up, but the stock could be dead money until and unless that happens. (For more, see 8 Signs Your Neighborhood Is On The Upswing.)

TUTORIAL: Economic Indicators: Housing Starts

Q1 Results - Good, Bad and Ugly
Investors were not overly thrilled with LPX's first quarter results, as the company's loss was quite a bit worse than analysts had forecast. It was not all bad news, though.

Revenue rose 12% this quarter versus a year ago, mostly on the strength of siding and oriented strand board (OSB). Given that housing starts dropped about 10% during the first quarter versus the year ago quarter, that is a pretty impressive performance. In OSB (oriented strand board), LPX saw 18% volume growth as more and more builders choose OSB over plywood.

Costs and profits are still problematic, though. While OSB volume increased nicely, prices continue to weaken - down 5% for LPX this quarter. Gross margin did improve about 130 basis points, but the company still posted an operating loss (albeit a smaller one). What's more, with spot OSB prices below the cash cost of production, the profitability of the LPX siding business is even more important than before. (For more, see Analyzing Operating Margins.)

The Best House in a Bad Neighborhood
Louisiana-Pacific is the largest player in OSB, with about one-quarter share. Georgia-Pacific (owned by Koch Industries) is a close second, while Canadian company Norbord is third and Weyerhaeuser (NYSE:WY) is fourth. Throughout this crushing homebuilding market, LPX has done a good job of taking costs out of system and improving efficiency. But there is only so far the company can go without a healthier housing market.

Overseas market expansion does offer some opportunity. Chinese homebuilders continue to build left, right and center, and more and more of them are adopting OSB. OSB is cheaper and more consistent than plywood, and it can be manufactured from trees that are too small to harvest for plywood. (For more, see Overseas Investing No Protection Against Downturn.)

The Bottom Line
It is hard to see how a rebound in residential construction would not also be good news for companies like Universal Forest Products (Nasdaq:UFPI), Rayonier (NYSE:RYN), Plum Creek (NYSE:PCL) and Potlatch (NYSE:PCH). The thing is, all of those companies except UFPI own timberland and pay dividends like Weyerhaeuser, and UFPI also does pay a dividend. So here is the dilemma. LPX is cheaper than any of those other names right now, assuming some recovery in residential building during the next five years. Unfortunately, the OSB market is not healthy right now from a cash flow perspective and LPX still has interest payments to burden the income and cash flow statements.

For aggressive investors who can afford to take a chance and be wrong, LPX is an interesting speculation. More conservative investors, though, may be happier paying for the extra security offered by dividend-paying owners of extensive timberlands. (For more, see The Essentials Of Corporate Cash Flow.)

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