Boise Cascade Company Remains Resilient Despite Challenges

seekingalpha11-19

Despite short-term demand constraints, Boise Cascade Company's share repurchase program and dividend payments reflect confidence in its finances, supporting a "hold" rating for the medium-to-long term...

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In the near term, home affordability and economic uncertainties can constrain demand. The housing market has a mixed outlook as single-family housing starts show an uptrend, contrasting with the decline in multi-family starts. A steep decline in laminated veneer lumber and I-joists sales prices primarily accounted for the fall in Q3. Desp","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4104":"贸易公司与经销商","BK4567":"ESG概念","BCC":"Boise Cascade L.L.C."},"translate_title":"博伊西瀑布公司尽管面临挑战仍保持弹性","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"BCC":0.9},"content_text":"Despite short-term demand constraints, Boise Cascade Company's share repurchase program and dividend payments reflect confidence in its finances, supporting a \"hold\" rating for the medium-to-long term.The housing market shows mixed signals, with single-family housing starts increasing but multi-family starts declining, impacting BCC's engineered wood product sales.With sufficient liquidity and a lower debt-to-equity ratio, BCC aims to meet shareholder returns through share repurchases and dividends.Ariel Skelley  Boosts Share Repurchase Amidst Demand Shortage I have previously discussed Boise Cascade Company (NYSE:BCC), and you can read the latest article here. In the near term, home affordability and economic uncertainties can constrain demand. The housing market has a mixed outlook as single-family housing starts show an uptrend, contrasting with the decline in multi-family starts. A steep decline in laminated veneer lumber and I-joists sales prices primarily accounted for the fall in Q3. Despite the gloomy short-term view, I have a more favorable medium and longer-term view on housing fundamentals. The company's additional share repurchase program and continued dividend payment reaffirm its confidence in its finances. The stock is reasonably valued compared to its peers. I consider the stock a \"hold\" for the medium-to-long term. Why Do I Keep My Rating Unchanged? I analyzed BCC in my previous article published on November 3, 2023. At that time, BCC benefited from long-term value drivers, including demographic advantages and low housing inventory. Despite operating in a rigid interest rate environment, its inventory management strategy, dividend payment, and share repurchase program demonstrated confidence in its finances. I wrote: The company has started Q4 on a low note as the sales volume in October declined from the Q3 average. In engineered wood products, pricing can be concerning as stiff competition would make a recovery tenuous. Despite the recessionary fears in the economy, the pace of new residential construction did not slow down. To offset the topline fragility, it recently acquired BROSCO, adding two distribution centers to expand its scale in the Northeast region. Nearly a year after my previous iteration, BOOM carried some of the earlier battles and added a few more. The residential construction market is still not in great shape, and the interest rate appears to be relenting after staying stoic for a year. The energy market remains volatile. Demand for the company's premier products was weak in Q3. Its balance sheet, however, has strengthened. The management leaves no opportunity unturned to boost investors' sentiment. Given its balanced relative valuation multiples, I reiterate my \"hold\" position. Assessing The Drivers FRED Housing data In September 2024, US housing sales (new one-family houses sold) increased by 6% compared to a year ago. The interest rate hike, which adversely affected housing affordability in the past several months, seems to be easing. Steady or low interest rates can lead to low mortgage rates. According to the US Census Bureau (as provided by BCC's management) estimates, the housing starts in 2025 will be marginally higher than in 2024. The housing market's headwinds are not over yet, though. Multifamily housing unit starts have declined sharply due to increased capital costs for developers. Increased home prices and the cost of financing with high mortgage rates have remained challenges for consumers. Consumers may respond to these by reducing home sizes and reducing BCC's market. I think 2025 will reflect modest growth in home improvement spending. A rise in homeowner equity can induce modest repair and remodel spending during the year. Near-Term Outlook In October, the company's sales showed a positive trend. Nonetheless, the industry typically sees fewer sales days in November and December. Adverse weather, economic uncertainty, and the negative vibe around mortgage rates will likely play hardball in BCC's sales growth. Investors may note that EWP (Engineered Wood Products) volumes will trend largely with single-family housing starts. In Q4, the trend is heading south. In the BMD (Building Materials Distribution) segment, sales can decline in November and December due to lower sales days. Driven by sales, the operating margins in these segments can contract, although lower commodity prices (engineered wood, plywood, and lumber) can offset some declines. My Growth Estimates Over the past 14 quarters, BCC's adjusted EBITDA increased by 5% on average. I do not see sufficient operational and industry tailwinds in the near term. EBITDA can decrease due to challenging market conditions and seasonality in its key segments. At a conservative rate, I expect its adjusted EBITDA to decrease by 3%-6% over the next four quarters. Margin Drivers Explained Seeking Alpha BCC's gross margin took a toll in Q3. Lower margins on commodities and EWP were the principal drivers of the $7.7 million decline in gross profit over the past year. However, the gross margin expanded in Q3. This reflects BMD's ongoing growth in general line sales and year-over-year margin improvement. EBITDA margin, however, decreased by 30 basis points in Q3. I think deleveraging of fixed costs and gross margin weakening from product price erosion can lower the company's EBITDA margin in Q4. Q3 Drivers Explained BCC's Filings As disclosed in the Q3 2024 earnings published on November 4, BCC's revenues from the Wood Products segment decreased by 12%, while the EBITDA margin fell by 680 basis points. Lower plywood, laminated veneer lumber (or LVL), and I-joists sales prices primarily accounted for the deterioration in the segment results. In Q3, pricing for LVL and I-joists was down 2% due to continued pressure in the market. Investors may note that housing starts, competition from wood-based products, and concrete floor applications determine I-joist sales. Its Building Materials Distribution segment revenues decreased by 6% in Q3, while its EBITDA margin fell by 70 basis points. Lower pricing in nearly all product lines negatively impacted the results. However, sales volumes were resilient. Lower margins on commodity products and EWP drove the EBITDA margin lower. Cash Flows And Debt Level In 9M 2024, BCC's cash flow from operations decreased by 34% compared to a year ago. Free cash flow (or FCF) declined by 51% during this period. Equipment delays in some projects in the Southeast US have reduced its FY2024 capex forecast. In 2025, its capital spending can range between $200 million and $220 million. BCC has a lower debt-to-equity ratio (0.21x) than some competitors (BXC, LPX, BRC). Its liquidity (cash & equivalents plus available borrowings from a revolving credit facility) totaled $1.15 billion as of September 30, 2024. The company pays a dividend of $0.21 per share. On October 30, 2024, it authorized an additional 1.4 million shares of share repurchase. It also has ~2 million shares available under its share repurchase program. With sufficient liquidity, it should meet its shareholder returns objective despite the fall in cash flows. Relative Valuation And Target Price Author Created and Seeking Alpha BCC's forward EV/EBITDA multiple is expected to expand versus the current EV/EBITDA. In contrast, its peers' forward EV/EBITDA is expected to remain unchanged. This implies BCC's EBITDA is expected to decrease while its peers' EBITDA can remain unchanged next year. This typically reflects in a lower EV/EBITDA multiple than peers. Because it is trading at a lower multiple than its peers, the stock is reasonably valued compared to its peers. The stock traded at a higher five-year average (10.8x). The average EV/EBITDA multiple for BCC's peers (BXC, LPX, and BRC) is 10.8x. If the stock trades at this average, the stock price can increase by 3% from the current level. The calculation is based on its current (or TTM) EBITDA of $670 million and multiplying the EBITDA with the peers' multiple. Then, we deduct net debt from it to arrive at market capitalization and divide it by the weighted average share count to get the target price. Since my last publication in November 2023, where I suggested a \"hold,\" the stock increased by approximately 47%. As discussed above, I expect 3%-6% adjusted EBITDA growth in the next four quarters. Feeding these values in the EV calculation and assuming the current EV/EBITDA multiple holds, I think the stock should trade between $143.8 and $147.8, implying a ~4% upside. Wall Street Rating Seeking Alpha In the past 90 days, three sell-side analysts rated BCC a \"buy\" (including \"Strong buy.\") Three analysts rated it a \"hold,\" while one rated it a \"sell.\" The consensus target price is $146.1, suggesting a 4.3% upside at the current price. Risk Factors FRED mortgage rate BCC's operations and performance critically depend on the US housing and residential construction market. The 30-year average fixed mortgage rate increased by 12% since the start of Q4. However, it is lower by 9% than a year ago. Economic uncertainties will continue to wrap consumer sentiment, while relatively higher interest rates will affect the increased mortgage rate. A low housing market or high mortgage rates can adversely affect home sizes and amenities. According to the National Association of Home Builders, the framing lumber composite price increased by 19.8% over the past year until November 8. If prices fall below the cash production or purchase costs, it can result in short-term losses. Also, the commodity wood product prices fluctuate considerably in response to economic uncertainties, among other things. Given the geopolitical uncertainty in various regions around the globe, the company may find it difficult to estimate future commodity price movements. What's The Take On BCC? Seeking Alpha BCC reserves a docile outlook. The current interest rate regime appears to favor a steady mortgage rate. Homeowners' equity investment can grow. However, the growth in renovation spending can decline. The company started Q4 on a solid note, as the sales volume was in October, but it could go downhill for the rest of the quarter. In engineered wood products, lower costs can bring some relief with the margin.  The cash flow burn in 9M2024 also reflects the operational challenges. Due to equipment delays in some projects in the Southeast US, BCC reduced its FY2024 capex forecast. On the positive, it looks to preserve and strengthen shareholders' equity through additional share repurchases and dividend distribution. This boosted investors' sentiment. So, the stock outperformed the SPDR S&P 500 ETF (SPY) in one year. Given the relative valuation, I think returns from the stock can \"hold\" ground in the medium-to-long term.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484445419"}