If you have $500, then based on the latest figures, you could 22 next-day air deliveries in the U.S. from UPS (UPS 0.14%) or around 890 board feet of lumber used by Louisiana-Pacific (LPX -0.33%). But you might prefer to invest the money in their shares. Having rather unsubtly introduced these two Warren Buffett holdings, it's time to take a closer look at why they might suit new investors looking to enter the market.
Two companies with nothing in common but an investment proposition
A package delivery giant and a building materials company might not have much in common regarding operations, but they share many things as investment propositions. Not only are they both held by Buffett's Berkshire Hathaway, but buying them also requires you to think like Buffett.
Image source: The Motley Fool.
That's because both are cyclical companies. That's financial jargon for companies whose revenue and earnings tend to go up and down with the economy or some other underlying metric.
You can see this by looking at their long-term revenue growth -- a clear uptrend with significant oscillations. In UPS' case, the critical metric is the economy, as demand for deliveries tends to follow economic growth. For Louisiana-Pacific, it's housing starts, as its wood siding and boards are used by builders, remodelers, and homeowners in the new home and remodeling market.
Data by YCharts
It's no secret that rising interest rates have hit the housing market (bad news for Louisiana-Pacific) and slowed overall economic activity (bad news for UPS). Consequently, Wall Street analysts expect earnings for both companies to decline in 2023.
|
Wall Street Consensus EPS |
2022 |
2023 Est. |
2024 Est. |
|---|---|---|---|
|
UPS |
$12.94 |
$10.71 |
$11.80 |
|
Louisiana-Pacific |
$11.77 |
$2.84 |
$4.41 |
Data source: Yahoo! Finance.
Investing like Warren Buffett
If you want to follow Buffett into a stock, you should adopt his long-term investing mindset. A long-term value investor isn't interested in just one year's earnings but rather the long-term earnings potential in the stock. The decline in earnings in 2023 could be seen as a cue to buy cyclical stocks, as such situations often create good buying situations.
As you can see above, Wall Street expects 2023 to be a trough year for both companies and earnings to grow again in 2024. Moreover, both companies have long-term underlying growth prospects, and buying into them involves taking a long-term view of a stock in an unfashionable sector -- classic Buffett stuff.
UPS' transformation continues
The company is more than just a play on growth in demand for deliveries. It's also a play on the type of deliveries it makes. Over the last five years, UPS has been engaged in a transformational strategy to increase the profitability of its business by focusing on growth in crucial targeted markets like small and medium-sized businesses and healthcare end markets. At the same time, management has expressed a willingness to forego less profitable business-to-consumer deliveries for Amazon.com.
Data by YCharts
It worked to help the company significantly improve its profit margins (see chart above) and cash flow in recent years, as management focused on growing the right kind of deliveries rather than chasing volume growth. See here how, even though volumes declined, average revenue per piece growth led to overall revenue growth in its U.S. segment.
While volumes have declined more than expected so far in 2023, and the company lowered its full-year earnings expectations on its first-quarter earnings call, I think UPS' strategic transformation initiatives will mean it will emerge from the economic slowdown in better shape as an overall business.
Data source: UPS presentations.
Louisiana-Pacific is more than housing starts
Housing starts matter because they determine spending on the kind of siding and oriented strand board (OSB) that makes up most of Louisiana-Pacific's sales. They also matter because they tend to lead the overall housing market -- a buoyant new home market usually means a healthy housing market, and that's good news for remodeling activity.
Aside from a recent blip in housing starts, both starts and home sales have been weak as higher interest rates started to bite through 2022 and 2023.
Data by YCharts
Still, rates won't rise forever. Moreover, Louisiana-Pacific has a long-term opportunity to grow market share in siding from alternatives like vinyl, fiber cement, and cellular PVC, because its wood fiber is sourced sustainably. In fact, according to management, its wood fiber is carbon negative. Its OSB is also less expensive and more sustainable than plywood for use in boards and panels.
As such, Louisiana-Pacific also has an opportunity to emerge from the slowdown in better shape than in previous recoveries.
Stocks to buy?
All told, UPS and Louisiana-Pacific both carry the seal of approval of a Buffett stock holding and offer long-term growth for investors looking to learn to invest for their future.
