Risks To Shareholder Returns Are Elevated At These Prices For Louisiana-Pacific Corporation (NYSE:LPX)

Simply Wall St ·  Feb 14 08:47

When you see that almost half of the companies in the Forestry industry in the United States have price-to-sales ratios (or "P/S") below 0.3x, Louisiana-Pacific Corporation (NYSE:LPX) looks to be giving off some sell signals with its 1.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

NYSE:LPX Price to Sales Ratio vs Industry February 14th 2024

How Louisiana-Pacific Has Been Performing

Louisiana-Pacific has been struggling lately as its revenue has declined faster than most other companies. It might be that many expect the dismal revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Louisiana-Pacific will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

Louisiana-Pacific's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 34%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 6.6% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 4.7% per annum as estimated by the nine analysts watching the company. With the industry predicted to deliver 3.3% growth per annum, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Louisiana-Pacific's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Louisiana-Pacific's P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Given Louisiana-Pacific's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Before you settle on your opinion, we've discovered 2 warning signs for Louisiana-Pacific (1 is potentially serious!) that you should be aware of.

If these risks are making you reconsider your opinion on Louisiana-Pacific, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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