Why Louisiana-Pacific Will Likely Pull Back

Does this analyst make a good case? Or is it just more noise from Wall Street?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Oct 16, 2013 at 3:19PM
Energy, Materials, and Utilities

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Louisiana-Pacific (NYSE:LPX) slipped 2% in early Wednesday trading after TD Securities downgraded the building-products company from hold, to reduce.

So what: Along with the downgrade, analyst Sean Steuart lowered his price target to $16 (from $16.50), representing about 8% worth of downside to yesterday's close. Louisiana-Pacific shares have rallied nicely ever since announcing the purchase of Ainsworth Lumber in early September, but Steuart believes that the valuation is a bit rich at the current levels.

Now what: TD is now targeting an EV/EBTIDA multiple of 6.6 on the shares, down from its prior view of 6.9. "We believe that LP's valuation is discounting an expectation of exceptional free cash flow over the mid-term; we expect rising average OSB prices over the next year, but are less optimistic than others on the company's free cash flow prospects," noted TD. When you couple that recent investor enthusiasm with the volatile long-term nature of the building products space, I'd agree that Louisiana-Pacific's risk/reward doesn't look too appealing.