BCC - Boise Cascade: Not Worth Investing At The Current Level

2023-11-02 16:41:24 ET

Summary

• BCC announced weak Q3 FY23 results due to sales decline in wood products and building materials distribution segments.
• The company's net income also saw a decline of 34.8% compared to the previous year.
• Despite the high share price, investing in BCC at the current level may be risky due to unfavorable market conditions and future outlook. A hold rating is assigned.

Boise Cascade (BCC) manufactures and distributes wood and building products. BCC recently announced its Q3 FY23 results. Weak market conditions affected its growth in Q3 FY23, and I expect it continue to affect its sales growth in the coming quarters. Despite the weak results, its share price is near the all-time highs. I believe investing at such a high level when the market condition and future outlook aren’t favorable might not be a good idea. Hence, I assign a hold rating on BCC.

Financial Analysis

BCC recently announced its Q3 FY23 results . The sales for Q3 FY23 were $1.8 billion, a decline of 14.8% compared to Q3 FY22. The reason for the decline was sales decline in both wood products and building materials distribution segments. The sales from the wood products segment declined by 13.4% in Q3 FY23 compared to Q3 FY22. The major reasons for the decline were a 20% decline in plywood sales price and a lower sales volume of EWP. The sales from the building materials distribution segment declined by 14.6% in Q3 FY23 compared to Q3 FY22. This segment was affected by lower commodity and doors and roofing sales. Its adjusted EBITDA margin for Q3 FY23 was 11.8%, which was 15.1% in Q3 FY22. The decline in EBITDA margin was mainly due to lower EWP margins and low pricing across segments.

Its net income also saw a decline. It declined by 34.8% in Q3 FY23 compared to Q3 FY22. Well, there are a number of factors that affected its results in this quarter, and what is concerning is that these factors might continue to affect its sales growth in the coming quarters. First, the housing crisis in North America, the mortgage and interest rates have affected the housing activity in North America and it is way below than what it was in 2022. Till the time the housing crisis headwind is under control, I believe the company might find it hard to boost its sales growth. In addition, the lumber prices in the U.S. are going down, and with the decreasing demand for its products, I don't think they might enjoy the higher pricing that they did in 2022. This is another factor that might affect the sales, and in the United States, wintertime housing activity is often the lowest of the year. So, looking at the macroeconomic headwinds and seasonality, I believe sales in the fourth quarter might be the lowest in FY23. If we compare the first nine months sales of FY23 and FY22, we can see that its FY23 sales are lagging way behind FY22 sales, and looking at the market conditions, I think we might see a big miss in the yearly sales comparison in the next quarter which can adversely affect the share price of the company.

Technical Analysis

BCC is trading at $99. The chart of BCC looks quite good for now. It gave a breakout from the $84 level in the month of June, and after giving a breakout, it went up by 33%. After giving a solid up move, the stock price started to correct, and after correcting, the stock formed a solid green candle. So, the setup here is quite good for swing traders or short-term traders because the stock price may rise in the near term, and it can be a good pullback trade. But talking about the long term, I think one should wait for the price to retest the breakout level of $84. Because after giving a breakout, the majority of the time, the price comes back to retest the breakout level. So when the stock reaches the $84 level, one can add it for the long term as the chart of BCC looks great, and I believe after the retest is done, the stock might look for a new all-time high. Hence, looking at the price action, I assign a hold rating on BCC.

Should One Invest In BCC?

Despite the weak results, its share price is near its all-time high, and its share price has done well in the last few months. But the current and the future outlook for the company doesn't look good, and it might continue to struggle financially in the coming quarters. So I believe investing at the current level might be risky as the market conditions aren't favorable, the company has been struggling in terms of growth, and the current housing trend doesn't look good. So, there are many negative factors that might affect its share price in the coming times. So, I would not suggest investing at such high levels; instead, I would advise one to wait for market conditions to get normal. Hence, I assign a hold rating on BCC. But I want to point out a few points that might work in the company's favor, which can positively affect the share price even in this unfavorable market. BCC has a strong balance sheet and lots of cash, and they are using the cash to expand its geographical presence. They recently acquired Brockway-Smith Company, which will expand their presence in the Northeast markets. They also acquired a distribution center in Florida. So even though the market conditions aren't favorable, the management's approach to boosting the company's growth through acquisitions might work in their favor, and the valuation at which BCC is trading is quite cheap. BCC has a P/E [FWD] ratio of 8.15x compared to the sector median of 16.38x. So if their acquisition strategy works in their favor and if the reported sales beat the market expectations in the coming quarter, its stock price might continue its uprun even if the reported sales are lower on a comparable basis. But I believe it is highly unlikely to happen.

Risk

In some market segments, their products can face competition from substitute alternatives. For instance, builders may utilize composite, steel, concrete, wood/plastic, or plastic materials in place of the plywood and EWP produced by their Wood Products division. Price fluctuations for wood-based fiber, chemicals, and oil can affect how competitively their products are positioned against those of their competitors and perhaps lead to a rise in the use of those substitutes in place of their own. The market for their products may contract as the usage of these substitutes increases. Additionally, other wood-based products may replace their primary manufactured goods. For example, OSB is gaining market share in both residential and non-residential applications for plywood, while numerous dimension lumber producers are competing with them for their strand-based EWP. Furthermore, several dealer clients of the company have increased the capacity of their floor trusses, partly because of the restricted availability of I-joists during the past two years. Increased truss production could have a detrimental effect on their net sales pricing and market share for I-joists.

Bottom Line

Unfavorable market conditions hampered its growth, and we can clearly see that in the results. I expect that it might continue to struggle in the coming quarters due to the adverse market conditions. Its current share price is near all-time highs, and investing in it at such a high price might not be a good idea. Because the outlook isn’t good, investing at the current level might get your money stuck, and it might not be able to provide returns in the coming times. Hence, I assign a hold rating on BCC.

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