Boise Cascade Co. (BCC, Financial) manufactures wood products and distributes building materials across North America. It’s two key segments are Wood Products and Building Materials Distribution.
The Wood Products segment manufactures laminated veneer lumber and laminated beams used in construction projects. Specific products include headers and beams, I-joists for residential and commercial flooring and roofing systems and other structural applications. This segment’s products are used in new residential construction, residential repair-and-remodeling markets, light commercial construction and industrial applications.
The Building Materials Distribution segment distributes building materials, including oriented strand boards, plywood and lumber as well as general line items, such as siding, composite decking, doors, metal products, insulation and engineered wood products. This segment sells its products to dealers, home improvement centers and specialty distributors.
The company was founded in 1957, generated almost $8 billion in revenue in 2021 and currently has a market capitalization of $2.4 billion.
Wood prices
Record lumber prices occurred in 2021 with the price of lumber topping out at approximately $1,686 per 1,000 board feet. The strong post-Covid economy combined with low interest rates created a high demand environment from home builders and commercial construction companies. The supply decline in 2022 created a perfect storm for lumber prices.
After a year-end decline in 2021, lumber prices spiked again in 2022 as demand continued to outstrip supply. Prices increased to over $1,400 per 1,000 board feet in March 2022. Supply chain issues continue to affect the industry, particularly among transportation networks. Labor issues at sawmills are also affecting production levels as they struggle to find qualified workers.
Financial review
Boise Cascade benefited from these high lumber prices with revenue increasing 44.8% in 2021 and net income increasing four-fold from 2020 levels. This windfall created high levels of operating cash flow totaling $466.7 million and, with capital expenditures of only $106.5 million, free cash flow was $561 million for the year.
The company’s balance sheet is in great shape with $922.7 million in cash and debt of $444.8 million as of the end of the first quarter ending March 31. First-quarter results were also strong with revenue increasing 28% and adjusted Ebitda increasing 89%.
CEO Nate Jorgensen stated in the earnings release that "both businesses delivered tremendous financial results in the first quarter."
"I am very thankful for our associates and their continued focus on providing exceptional service to our customer and supplier partners," he said. "As we move into second quarter, we continue to experience steady demand across product lines and strong pricing on engineered wood and general line products. Our team has also done a great job of mitigating exposure to commodity price declines experienced early in the quarter. With the strength of our balance sheet we are intent on deploying capital to create shareholder value, including execution of our growth strategies.”
Free cash flow in the quarter was $181.1 million, which allowed the company to build up its cash war chest of over $900 million.
Valuation
It is very likely these high operating margins experienced in 2021 and the first half of 2022 cannot be maintained. Pre-pandemic, margins were typically in the mid-single range and are expected to return to those levels in 2023 and 2024 as supply chain issues are resolved and home builder demand slows down.
Consensus earnings per share estimates, which roughly account for those mid-single-digit margins, are $7.55 for 2023 and $7.65 for 2024. This year's earnings per share estimate of approximately $18 is not meaningful analytical purposes. Nonetheless, a forward price-earnings ratio of around 10 is not excessive at this time.
The company is paying a common quarterly dividend of 12 cents per share, which is a dividend yield of 0.78% at this time. However, the company often pays a special dividend when cash flow levels are high. A special dividend of $2.50 per share was declared in May 2022. Total dividends paid in 2021 equaled $5.42 per share.
Using forward earnings per share estimates of $7.55 for the starting point for the GuruFocus DCF calculator, a value of $88 per share is created. That assumes only 4% 10-year growth rates.
Summary
Although the extraordinary financial results experienced in 2021 and 2022 will not be repeated anytime soon, the company is likely to stay very profitable and generate significant free cash flow over a near-to-mid-term time frame.
With a market cap of only $2.4 billion, Boise Cascade may be a potential acquisition candidate due to its established infrastructure and high-quality balance sheet.
