Louisiana-Pacific (LPX) manufactures building products for home construction, repair, and remodeling end markets. It operates in four segments: North American Oriented Strand Board (OSB); Engineered Wood Products (EWP), Siding; and South America.

OSB, a product made from wood strands arranged in layers and bonded with resin, typically is the biggest source of annual sales. It serves many of the same uses as plywood, including roof decking, sub floors, and sidewall, but can be produced at a relatively lower cost. In the last few decades, endangered animal species, environmental concerns, and land use regulations have reduced supplies. This in turn has led many plywood mills to divert their production lines to other uses, and OSB has taken up most of the slack. OSB (15.3 billion square feet) currently accounts for roughly 60% of total structural panel consumption (26.7 billion square feet) in North America. Louisiana-Pacific controls 3.3 billion square feet, or 22%, of North American capacity.

EWP produces and distributes laminated veneer lumber (LVL), I-Joists, laminated strand lumber (LSL), many other related offerings. Louisiana-Pacific is one of the top three producers of I-Joists, LVL, and LSL in North America. The Siding business has two categories: Smartside siding products and related offerings; and Canexel siding and accessory products. Lastly, the South America division manufactures and distributes OSB and siding products in that region and for export markets.

Louisiana-Pacific reported a return to black ink in 2012, after five years of hefty losses. This reversal in operating results is due to improvement in the real estate market, with the number of housing starts likely advancing sharply over the previous year’s level, to nearly one million. With the Federal Reserve committed to keeping interest rates low through 2014, momentum should continue.

This sharp rebound in construction activity, combined with idled capacity and minuscule inventory levels, has resulted in surging prices for OSB. At one point, OSB prices skyrocketed to $350 per million square feet (msf) in certain markets, though pricing has cooled a bit more recently. In light of the aforementioned improvement in the housing market, demand for other building products manufactured by Louisiana-Pacific’s Siding and EWP segments appears to be on the mend.

Given expectations of a cyclical upturn, this building products manufacturer is seeking to add capacity. Louisiana-Pacific has entered into an agreement to acquire Canfor’s 50% share in the Peace Valley oriented strand board joint venture. Once this transaction closes, the company will be the sole owner of a facility that has annual OSB production capacity of 820 million square feet. Management intends to add another line at the site and restart the idled Clark County mill. Both of these measures would bring 450,000 msf of new LPX capacity on line. In all, this Tennessee-based entity is looking for 1.0 billion-2.0 billion square feet of new industrywide demand.

In this relatively more auspicious operating environment, earnings and cash flow should advance. Moreover, the latter ought to enable the company to start lowering its substantial long-term debt/capital ratio.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.