Summary
- Boise Cascade Company recently demonstrated weak sales, profits, and cash flows.
- These results are masked by stellar performance for 2022 as a whole if you only look at the annual results.
- A weak housing market that is likely to worsen from here is largely to blame, and the end result could be more pain for the company moving forward.
- But given how cheap shares are, it seems as though this fundamental pain is already priced in.
To many investors, it may seem too risky or dangerous to buy stock in firms that you know are going to see some fundamental deterioration. Having said that, I have found doing so to be interesting because it opens up the opportunity that either the market has become overly harsh on the investment in question and/or you end up with a scenario where you still get the stock dirt cheap if you assume that a recovery will eventually come about. One company that fits this description that's on my list of prospects is Boise Cascade Company ( BCC ), a firm that produces and sells a variety of wood-oriented products such as laminated veneer lumber, laminated beams, I-joists, plywood, strand board, and more. Despite having a fantastic 2022 fiscal year, the company has started showing some real signs of weakness. Current conditions in the housing market suggest that additional pain for this player and in this space is just around the corner. But given just how cheap shares are, I cannot help but to think that some nice upside exists for shareholders in the long run. As such, and in spite of a decline in the company's share price recently, I've decided to keep the 'buy' rating I had on the stock previously.
Interesting results this quarter
Back in the middle of November 2022, I analyzed Boise Cascade Company to see whether or not the company was still worthy of an upside despite concerns about what the 2023 fiscal year might look like. Up to that point, strong fundamental performance had served to push shares of the company higher. In fact, from the time I had written about the company prior to that until my November article, shares had generated an upside for investors of 18.2% compared to the 1.6% rise the S&P 500 experienced. Given how cheap shares of the company were, however, I felt as though additional upside existed for shareholders. This led me to keep the 'buy' rating I had assigned the stock previously. Since then, things have not gone exactly as they did the first time. While the S&P 500 is down only 0.3%, shares of Boise Cascade Company have seen a downside of 5.9%.
This return disparity is not without cause. To see what I mean, we need only cover financial results for the final quarter of the company's 2022 fiscal year. According to management, revenue came in at $1.63 billion. That's 8.6% lower than the $1.78 billion the company reported one year earlier. The amount of revenue reported actually missed analysts' expectations by $150 million. That's a significant disparity. During this window of time, the company saw weakness across the board. The greatest pain though came from a roughly 12% decline in sales associated with its Building Materials Distribution operations. Revenue there plummeted $201.7 million, largely as a result of a 14% decline in sales volume that was offset only marginally by a 2% increase in pricing. Wood Product segment sales, meanwhile, fell around 5%. Strong pricing in some of its products, such as a 40% increase charged for I-joists, was more than offset by lower sales volumes. I-joists sales volumes, for instance, dropped 55% year-over-year.
As revenue dropped, profitability took a hit. Net income in the final quarter of 2022 came in at $117.4 million. That's down significantly from the $169.1 million reported one year earlier. The earnings per share for the company during this time came in at $2.95. That actually missed what analysts expected by $0.01 per share. It is true that operating cash flow jumped year over year, shooting up from $139.9 million to $227.1 million. But EBITDA for the company declined from $247.9 million to $188.2 million.
If you were to look at the fourth quarter of each of those fiscal years alone, you would be forgiven for thinking that 2022 was a rough year for the company. By all accounts, 2022 was fantastic. For that year in its entirety, sales came in at $8.39 billion. That's 5.8% higher than the $7.93 billion reported one year earlier. Just like how the fourth quarter of the year saw weakness across the board, the year as a whole experienced strength. Higher pricing, offset by reduced sales volumes to some degree, was responsible for pushing sales under both of the company's major segments up by roughly 7%. Some of this growth was undoubtedly driven by the company's acquisition of Coastal Plywood. Strong pricing for the company allowed profits and cash flows to rise as well. Net income, for instance, shot up from $712.5 million in 2021 to $857.7 million in 2022. Operating cash flow soared from $667 million to $1.04 billion. And EBITDA expanded from $1.05 billion to $1.26 billion.
If we use data from the two most recent fiscal years, shares of the company look quite cheap. On a price-to-earnings basis, using data from 2022, we end up with a multiple for the firm of 3.1. This increases slightly to 3.8 if we rely on data from 2021. We only see a meaningful increase if we use data from 2022. In this scenario, the multiple rises to a respectable 15.4. We see similar trends with other profitability metrics. The company went from a price to operating cash flow multiple of 9.2 in 2020 all the way down to a multiple of 2.6 in 2022. And it went from an EV to EBITDA multiple of 5.1 in 2020 to only 1.7 in 2022. As part of my analysis, I also compared the company to five similar businesses. On a price-to-earnings approach, these firms ranged from a low of 11.9 to a high of 25.9. Using the price to operating cash flow approach, the range was from 9.2 to 22.7. And when it comes to the EV to EBITDA approach, the range would be from 7 to 15.7. In all three cases, Boise Cascade Company was the cheapest of the group.
Company | Price/Earnings | Price/Operating Cash Flow | EV/EBITDA |
Boise Cascade Company | 3.1 | 2.6 | 1.7 |
Martin Marietta Materials ( MLM ) | 25.9 | 22.7 | 15.7 |
Summit Materials ( SUM ) | 13.3 | 12.7 | 7.0 |
TopBuild ( BLD ) | 12.8 | 14.6 | 9.2 |
Installed Building Products ( IBP ) | 16.4 | 13.8 | 9.3 |
Eagle Materials ( EXP ) | 11.9 | 9.2 | 8.6 |
Takeaway
Those who are critical of Boise Cascade Company will argue, and justifiably so, that the near-term outlook for the company can't be great. I agree with that. Management has not provided any detailed financial guidance for the year. But they did say that they expect weakness ahead. For instance, total housing starts in the 2023 fiscal year for the US for both single and multifamily housing projects should come in at between 1.1 million and 1.3 million. This compares to 1.55 million reported for the 2022 calendar year and 1.60 million reported for the 2021 calendar year. Given the company's business model, it is related heavily to what goes on in the housing space. So I have no doubt that, absent some miracle, 2023 will look a lot worse than the past couple of years has been. But even if financial performance reverts back to what it was in 2020, shares would still look cheap on a cash flow basis. Add in the fact that we live in a country where the population is set to continue growing for the foreseeable future, and keep in mind that any pain we experience now will be transitory, and I have no problem keeping it a 'buy' at the moment.
For further details see:
Boise Cascade Company: Attractive Despite Recent Troubles