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Transcript of LPX Presentation.ppt
LOUISIANA-PACIFIC CORP (LPX)
RESEARCH PRESENTATIONNovember 7, 2002
Mark A. HughesPortfolio Manager, Sloan IMC Educational Investment Trust
Class of 2003
2
Personal Background
• PM of the Sloan Educational Investment Trust• Prior to Sloan worked at investment bank in Seattle• Summer internship in high yield research at WR Huff
Asset Management• Pursuing CFA
3
Methodology
• SEC filings (10K, 10Q, 8K)• Earnings conference calls• Industry websites• The evil sell-side• Primary research• Financial modeling• Every analyst and buy-side shop has their own
preferences
4
Industry Overview: Building Products
• Innovation in building products???• Plywood vs. OSB• OSB for different uses• Engineered wood products: LVL and I-joists• Wood-related industries are highly correlated
5
S.O.B., it’s OSB!
6
Company Overview
• North America’s largest manufacturer of OSB• Large holdings of timber and sawmills• Engineered wood products, siding• Dumping non-key assets:
– Lumber assets and some mills– Plywood (traded to GP)– Particleboard, MDF– Distribution and trading
7
Competitive Environment
• Three biggest competitors control 57% of the OSB market: LP, Weyerhaeuser, IP
• Overcapacity has crushed OSB prices• Taking down of capacity
8
ST OSB PricesOSB and Plywood Prices - Last 18 Months
$100
$150
$200
$250
$300
$350
Apr-01
May-01
Jun-01
Jul-01 Aug-01
Sep-01
Oct-01
Nov-01
Dec-01
Jan-02
Feb-02
Mar-02
Apr-02
May-02
Jun-02
Jul-02 Aug-02
Sep-02
$ / 1
,000
sq
ft
OSB
Plywood
9
LT OSB PricesOSB Prices - Last 10 Years
$0
$50
$100
$150
$200
$250
$300
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 YTD
$ / 1
,000
sq
ft
10
Customer Base
• Two channels: new home builders and repair /
renovate retailers
• New housing starts strong: 1,843,000, 13% bigger
than August and 16% greater than Sept 2001
• Home Depot, Lowe’s, and Menards are holding up
and report strong sales of LPX products
• Weather can also be a factor (seasonality)
11
CompsName Louisiana-Pacific Corp. Georgia-Pacific Corp. Weyerhaeuser Co. International Paper Co.
Industry Lumber, Wood Production Lumber, Wood Production Lumber, Wood Production Paper Products
Current Share Price $7.65 $15.42 $47.38 $36.69
Shares Outstanding 104,600,000 232,044,000 221,240,000 481,779,000
Market Value $800,190,000 $3,578,118,000 $10,482,351,000 $17,676,472,000
Revenues $2,197 mil $23,960 mil $16,107 mil $24,997 mil
Net Earnings $-89 mil $-146 mil $201 mil $-147 mil
'02 EPS (0.15) 1.49 1.03 1.10
'03 EPS 0.44 2.27 2.84 1.98
'02 Forward P/E -51.0 10.3 46.0 33.4
'03 Forward P/E 17.4 6.8 16.7 18.5
Price/Sales 0.3 0.1 0.7 0.7
Price/Cash Flow 11.8 NA 11.5 NA
Price/Book 0.6 0.7 1.5 1.6
ROE NA NA 3.00% NA
ROA -3.10% -0.60% 0.70% -0.40%
Debt / Total Capital 51.40% 70.78% 70.00% 54.78%
Beta 1.3 1.5 1.1 0.9
12
Capital Structure
in USD
Cash 100,200,000
Restricted Cash 47,800,000
ST & LT Debt 1,104,400,000
Less: Notes Receivable 403,800,000
Net Debt 552,600,000
Common Stock (104,600,000 Shares @ $7.65) 800,190,000
Enterprise Value 1,352,790,000
LTM EBITDA 151,852,000
EV/EBITDA 8.91x
2003 EBITDA 238,546,766
EV/EBITDA 5.67x
LPX Capital Structure as of Q3 2002
13
Credit Snapshot
1999 2000 2001 2002E 2003EEBIT 370 30 (232) 86 107 EBITDA 572 265 (37) 221 239 Less Interest Expense (13) (44) (57) (57) (29) Less Cash Taxes (140) 8 112 (10) (27) Less CAPEX (88) (188) (69) (45) (45) Less Increase in WC (9) (150) 118 48 (26) FCFe 323 (109) 67 157 112
EBITDA / Interest 45.72x 5.98x (0.64x) 3.85x 8.31xDebt/EBIT 2.87x 41.46x (5.13x) 12.84x 5.61xDebt / EBITDA 1.85x 4.62x (32.59x) 5.00x 2.51xDebt/FCF 3.28x (11.27x) 17.81x 7.05x 5.34xNI + Depr 419 222 24 120 183 NI + Depr - CAPEX 331 34 (46) 75 138 Annualized FCF % Debt 30.44% -8.87% 5.61% 14.19% 18.72%Debt / EBITDA - CAPEX 2.19x 15.82x (11.26x) 6.28x 3.09x
LP Credit Snapshot
14
Stock Performance
15
Current Stock Valuation
• Price = $7.65• 52-week range: $5.35 to $12.55• ’03 EPS = $0.44 / share• ’03 P/E = 17.4, in line with peers IP and WY• 2003 EV/EBITDA = 5.67x
16
Assumptions
• Proforma Assumptions: – OSB Prices increase to $180 / 1,000 sq ft by 2004– Divestiture of $575 million of timber and other assets– Core operations reduced to OSB, EWP, siding
• DCF Assumptions:– 5-year time horizon– 2% terminal value growth rate– Terminal value based on EV/EBITDA multiples
17
Equity Valuation
• Competitors’ 2003 P/E: $ 7.75• Comp. Transaction EV/EBITDA (8x): $18.28• Historical EV/EBITDA (6.5x): $14.82• DCF (13% WACC, 7x EBITDA TV): $13.08
18
DCF Valuation2003 2004 2005 2006 2007 2008 and Onward
FCFe 111,913 154,316 158,269 158,841 159,456 162,646EBITDA 238,547 245,573 246,729 247,973 249,313 254,299
10% 11% 12% 13% 14% 15% 16%PV 2003-2007 555,684 541,057 527,022 513,546 500,601 488,162 476,201
TV EBITDA Mult 10% 11% 12% 13% 14% 15% 16%
4x 1,129,865 1,084,893 1,042,365 1,002,125 964,023 927,924 893,702
5x 1,273,411 1,220,852 1,171,201 1,124,269 1,079,878 1,037,865 998,077
6x 1,416,956 1,356,810 1,300,037 1,246,414 1,195,734 1,147,805 1,102,452
7x 1,560,501 1,492,769 1,428,873 1,368,559 1,311,589 1,257,746 1,206,828
8x 1,704,047 1,628,728 1,557,709 1,490,703 1,427,444 1,367,687 1,311,203
9x 1,847,592 1,764,687 1,686,545 1,612,848 1,543,300 1,477,627 1,415,578
10x 1,991,138 1,900,646 1,815,381 1,734,993 1,659,155 1,587,568 1,519,953
10% 11% 12% 13% 14% 15% 16%4x $10.80 $10.37 $9.97 $9.58 $9.22 $8.87 $8.545x $12.17 $11.67 $11.20 $10.75 $10.32 $9.92 $9.546x $13.55 $12.97 $12.43 $11.92 $11.43 $10.97 $10.547x $14.92 $14.27 $13.66 $13.08 $12.54 $12.02 $11.548x $16.29 $15.57 $14.89 $14.25 $13.65 $13.08 $12.549x $17.66 $16.87 $16.12 $15.42 $14.75 $14.13 $13.53
10x $19.04 $18.17 $17.36 $16.59 $15.86 $15.18 $14.53
LPX Equity DCF Valuation Matrix
WACC
LPX Share Price Valuation Matrix
19
Sell-side sentiment
• Some buy-side firms will totally ignore sell-side• General consensus is that sell-side analysts provide
interesting bits of data, access to covered companies, and the trader’s perspective on the name
• On LPX, sell-side is lukewarm due to bad industry conditions
D.A. Davidson BUY 16.00$ CIBC BUY 10.00$ UBS Warburg BUY 14.00$ Salomon Smith Barney OUTPERFORM 15.00$ Lehman Brothers EQUAL-WEIGHT 11.00$ Morgan Stanley Dean Witter EQUAL-WEIGHT 11.00$
CS First Boston NEUTRAL 12.00$
Prudential HOLD 8.00$
20
Positives & Negatives
+’s
• Low-cost producer of OSB• Focus on key markets• Divesting bad assets• Will be virtually debt-free• Solid FCF generator
-’s
• Pure commodity business• OSB overcapacity• Depressed prices• Siding liability• Labor troubles in Canada
21
Big Issues
1) Completion of asset sales
2) Pricing & excess capacity
3) Continued health of housing sector
22
Final Recommendation
• BUY: TARGET PRICE = $13
• Proposed Trade = 400 shares @ $7.65
• What will make the stock move– Upgrade from the sell-side– Successful asset sales– Debt repayments– Realization of cost reductions (through CAPEX)– Share buyback– Rebound in market will help depressed names