Description
In 2013, Boise began its journey as an independent company after spinning off from OfficeMax. Initially, it was a poorly managed business primarily focused on selling and distributing commodity plywood, with unimpressive EBITDA margins. However, under new management, the company has undergone a remarkable transformation, enabling it to capitalize on the lumber market dislocation during the Covid pandemic and positioning itself for attractive future cash flow returns on investment.
Through strategic acquisitions and organic investments, Boise's Wood Products business (EWP) now consists of 55% highly engineered wood products like I-Joists and LVL, up from 31% at its IPO. This shift has allowed the company to repurpose former lumber/plywood capacity for higher-margin products. Similarly, the Building Materials Distribution (BMD) segment has improved its product mix, now comprising 63% higher-margin EWP and General Line products, up from 49% at IPO. BMD also plays a crucial role in marketing EWP, selling 65% of Boise's EWP production, up from 41% at IPO.
EBITDA margins have expanded due to closer integration between EWP and BMD, favorable shifts in product mixes, and management's guidance for mid-cycle EBITDA margins at 15-20% for EWP and 4-5% for BMD. Since 2020, high volatility in lumber prices and supply shortages have also contributed to margin improvements.
Boise's business is strongly correlated to new single-family home construction, which consumes 90% of all EWP production. With half of EWP revenues coming from high load-bearing structural wood beams like LVL and I-Joists, Boise is well-positioned to capitalize on the shortage of newly built housing in the US. Furthermore, significant barriers to entry for new competitors, such as securing limited veneer supply, building EWP mills, hiring skilled laborers, gaining distribution, engineering testing/certifications, and customer brand recognition, contribute to the potential for significant price appreciation for EWP.
Business Description
Boise Cascade Company is a leading vertically integrated manufacturer and distributor of building materials with two segments: Wood Products and Building Materials Distribution (BMD). In Wood Products, the company sells highly engineered wood products that are primarily used in single family home construction and have better performance than ordinary lumber. Main products are Laminated Veneer Lumber (LVL), I-Joists, and Plywood. In BMD, the company operates a nationwide network of 38 distribution facilities that sell a broad line of building materials, including commodities, such as OSB, plywood, and lumber; general line items such as siding, composite decking, doors, metal products, insulation, and roofing; and EWP.
Facilities
Boise’s wood products facilities are in the Pacific Northwest and Southeast, near domestic logging sources. There are no facilities in Canada, reducing the exposure to pine beetle infestation. Similarly, BMD only serves the domestic market with distribution centers and millwork facilities nationwide. The two EWP facilities in Oregon and Idaho are the largest EWP facilities in the US.
Wood products is a vertically integrated supply chain. Boise purchases logs from timberlands, converts them into veneers, which then get converted into plywood. Veneers are used to create LVL. LVL and plywood is used to create I-Joists. Boise will sometimes purchase 3rd party intermediate products when it can source them at attractive prices. Boise also has a large business selling its own lumber and plywood production. Figure 16 illustrates how the various intermediate products come together to produce EWP.
Figure 16 Boise's vertically integrated manufacturing supply chain
I-Joists
I-Joists are engineered wood beams that are shaped like the letter “I”. They are created by taking two flanges of LVL (see below) and connecting them with a layer of oriented strand board (OSB). They are primarily used to support floors and roofs. I-joists compete with dimensional lumber – I-joists are more expensive, but are faster to install, easier to design, and offer a quieter floor. In 1998, 31% of all SF floor area was supported by I-joists, rising to 45% in 2017. 80% of I-Joists are consumed in new-home construction, mostly single family. Boise has a 51% market share by volume in all I-Joists produced in the US. I-Joists production has trended exactly with growth in SF housing starts since 2000.
Laminated Veneer Lumber (LVL)
An LVL is used as a replacement for dimensional lumber. By gluing many layers of 3.6mm thick veneers to make a single beam, an LVL spreads out any weak spots in the wood, resists warping and shrinking, achieves better elasticity and strength, and the lamination results in better moisture and insect resistance. An LVL can carry twice the load of same sized dimensional lumber. It also uses less space and is lighter resulting in faster construction time. Because LVLs are made from engineered wood, they can be made perfectly straight and in longer sizes (up to 40’), offering greater design flexibility than ordinary lumber. The downside of using an LVL is a significantly higher cost of materials. A survey by the National Association of Home Builders found that framing contributed just 20.5% to the total cost of constructing a single family home, of which 60% is labor and 40% is materials.
Laminated Veneer Lumber (LVL) is a type of engineered wood beam that allows the use of longer spans and fewer pieces to carry the same loads as dimensional lumber. 72% of LVL production is used in beams, headers, and rim boards, and the rest is used in I-Joist flanges described above. LVL production has increased at +3.2% CAGR since 2000, well exceeding single family new housing starts. Boise has a 25% market share by volume in all LVL produced in the US.
Figure 17 LVL Beams offer higher load bearing and slimmer profile vs. dimensional lumber but cost a significant premium.
Figure 18 Physical advantages of LVL over Dimensional Lumber
Figure 19 NAHB's breakdown of typical single family home construction cost, 2022
Our investment rationale for Boise hinges on three pillars: robust housing starts, a growing market share of EWP in new homes, and persistently high EWP prices. We anticipate that U.S. housing starts will continue to be strong throughout our investment period, with the consumption of LVL and other EWPs per housing start projected to increase. Due to capacity limitations and robust demand from home builders, EWP selling prices are expected to remain high.
Growth in housing starts is anticipated, driven by factors such as the millennial generation reaching their peak home-forming years and a continuous shortfall of newly constructed homes in the U.S. Post the sub-prime peak in 2005-2006, housing starts have not kept pace with the underlying demand. Now, as the largest demographic cohort, millennials are propelling the demand for new housing. Moreover, the construction industry's inability to match this demand has led to a substantial discrepancy between housing starts and the actual requirement for new homes. This disparity is likely to continue throughout our investment period, aiding the expansion of housing starts and benefiting companies like Boise that are poised to leverage this surge in demand for new single-family homes.
Boise is poised to outpace the overall growth in housing starts, thanks to its concentrated efforts on EWP products such as LVL and I-Joists, which are increasingly preferred by homebuilders over traditional lumber. Since 2000, the demand for LVL has outstripped the growth of single-family housing starts by a CAGR of 3.8%. This indicates Boise's niche products are gaining momentum in the market as the advantages of these advanced materials are recognized by builders. Additionally, Boise's dominant position in the EWP market, with a 26% share in LVL and 51% in I-Joist production in the U.S., positions the company to more effectively harness this escalating demand compared to its rivals. Consequently, Boise's revenues are expected to grow significantly.
Valuation
We see upside to $170/share based on 15 P/E on $11.34 2024E EPS. Comparable companies such as LPX, UFPI, and SJ are trading at 15 times forward earnings and possess more commoditized product lines with less exposure to single-family housing starts.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
- Sustained single family housing starts
- Increasing EWP use in single family construction
- Elevated EWP prices relative to commodity lumber