Will Rising Costs Mar Louisiana-Pacific's (LPX) Q4 Earnings?

Louisiana-Pacific Corporation (NYSE:LPX) is slated to report fourth-quarter 2018 results on Feb 13. In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate by 25.8% but revenues missed the same by 1.5%. In fact, the stock outpaced the Zacks Consensus Estimate on earnings and revenues in three of of the trailing six quarters.

Meanwhile, in the third quarter, this manufacturer of building materials and engineered wood products’ top and bottom lines grew 3% and 18.6%, respectively, given strong operational execution across business, coupled with continued focus on its value-add, as well as high-margin siding and specialty products.

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release. The Zacks Consensus Estimate for the quarter to be reported is pegged at 30 cents, trending downward from 33 cents over the past 60 days. Also, this reflects a decline of 58.9% from 73 cents reported in the year-ago quarter. Revenues are expected to be $618.1 million, down 13% year over year.

Factors That Might Influence Upcoming Results

Rising raw material costs as well as higher manufacturing expenses due to interrupted logistics in Western Canadian operations are offsetting the positives of the company. Wood fiber is the primary raw material used by the company, with the primary source of the same being timber. The cost of different varieties of wood fiber is subject to volatility owing to governmental, economic or industry conditions. The recent imposition of tariff on imported lumber raises a concern.

It uses a significant quantity of various resins in the manufacturing processes. Resin product costs are influenced by changes in the prices or availability of raw materials used to produce resins, primarily petroleum products, as well as the demand and availability of resin products.

Meanwhile, pricing pressure within oriented strand board or OSB segment during the third quarter had a negative impact on overall operating results of the company. The consequences of the same are expected to have been faced in the fourth quarter as well.

Additionally, ongoing headwinds in the Engineered Wood Products or EWP segment are an added concern. Over the past few months, Louisiana-Pacific is experiencing softer demand in I-Joists and LVL facility, along with higher cost of sales. In the first nine months of 2018, unit shipments in LVL operations were down 3% from the corresponding period of 2017. The trend is expected to have continued in the fourth quarter as well. Its LVL facility in Wilmington, NC was significantly damaged due to Hurricane Florence. The company expects the facility to be down through mid-December. It also anticipates additional costs of $10-$15 million, including capital to be incurred in the fourth quarter of 2018.

That said, Louisiana-Pacific has been consistently practicing robust pricing initiatives across business to offset the rising cost scenario. Meanwhile, strong demand across Siding, EWP and South America will continue boosting growth of the company. On the third-quarter 2018 conference call, Louisiana-Pacific stated that pricing is likely to remain high across all market segments. Pricing remained strong for strand and fiber SmartSide in the third quarter. Louisiana-Pacific also added that it is on track to deliver 12-14% revenue growth for Smart Side Strand.

What Does the Zacks Model Say?

Our proven model does not conclusively show that Louisiana-Pacific is likely to beat estimates in the to-be-reported quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Louisiana-Pacific currently carries a Zacks Rank #5 (Strong Sell).

It is to be noted that we caution against stocks with a Zacks Rank #4 (Sell) and 5 going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks With Favorable Combination

Here are a few construction stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat in the upcoming release:

Martin Marietta Materials, Inc. (NYSE:MLM) has an Earnings ESP of +2.05% and a Zacks Rank #3.

Forterra, Inc. (NASDAQ:FRTA) has an Earnings ESP of +8.99% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Toll Brothers Inc. (NYSE:TOL) has an Earnings ESP of +1.91% and holds a Zacks Rank #3.

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