Industry Reports

Deutsche Bank Reports Summaries

080506 Deutsche Bank Report - Louisiana-Pacific's 1Q in 200 Words

Deutsche Bank - Equity Research

Louisiana-Pacific {Ticker: LPX.N, Closing Price: USD 11.13, Target Price: USD 12.00, Recommendation: Hold}.

* Lowering price target from $16 to $12

The housing market shows no signs of recovery, and OSB prices continue to bounce along the bottom. Negative EBITDA margins and continued capex spending have combined to reduce LP's net cash position more quickly than anticipated. Our Hold rating is based on a balancing of extremely modest valuation along some metrics against extremely poor current conditions and cyclical outlook.

* 1Q results were about as expected

High tax rate helped mitigate losses. Reported EPS loss of $(0.47), aided by a 44% tax rate. At a 35% rate, it would look like $(0.54). DB @ $(0.55), FC @ $(0.52). Comps: 4Q07 = $(0.29); 1Q07 = $(0.36). Pos: Lower-than-expected volumes, high tax rate - both good things when margins are negative. Neg: Sharply negative margins (as expected), start-up costs (AL, Chile, Holton).

* View?

Despite a modest seasonal bounce in OSB prices in recent weeks, prices remain below average cash cost. The housing market shows no signs of recovery, and the industry still appears unwilling to undertake dramatic action necessary to return margins to acceptable levels. Boosting estimates slightly: '08 goes from $(1.70) to $(1.30) [2Q = $(0.25)], '09 goes from $(1.40) to $(1.00).

* Valuation/risks

Our price target is based on a 10% premium over what we consider a floor, based on asset value as well as trough valuation in the last severe downturn. Downside risks include further declines in new housing starts, higher interest rates, and a higher C$. The primary upside risks are that the housing market recovers faster than expected and that capacity rationalization tightens the OSB supply/demand balance.