Introduction
Boise Cascade Co. is a company that specialises in manufacturing wood products and distributing building materials. The company was founded in 1957 and is headquartered in Boise, Idaho. Boise Cascade Co. operates in the United States and Canada and has a diverse customer base, including home improvement retailers, building materials dealers, and wholesalers.
The wood products that Boise Cascade Co. manufactures include plywood, engineered wood products, laminated veneer lumber, and particleboard. The company also distributes various building materials, such as lumber, roofing, siding, insulation, and decking.
Boise Cascade Co. has a solid financial position, with steady revenue growth and high profitability. The company's revenue has consistently exceeded $1 billion annually and achieved high net income and EBITDA margins. Boise Cascade Co.'s stock price has generally performed well, with positive total returns over the long term.
Industry and Market Analysis
Market Analysis Framework
Boise Cascade Co. is a company that operates in the highly competitive wood products and building materials industry. The industry is influenced by external factors such as the state of the housing market, interest rates, and demand for new construction. Boise Cascade Co. competes effectively in the industry by offering a diverse range of sustainable and eco-friendly products and services to a broad customer base.
Regarding financial analysis, Boise Cascade Co. has a solid financial position with steady revenue growth and high profitability. The company's revenue has consistently exceeded $1 billion annually and achieved high net income and EBITDA margins. Boise Cascade Co.'s stock price has generally performed well, with positive total returns over the long term.
Regarding equity analysis, Boise Cascade Co. has a low PE ratio and a low forward PE ratio, indicating that the stock is undervalued. The company's PS ratio is standard, meaning the stock is undervalued relative to its revenues. The EV/EBITDA ratio is low, suggesting the company is undervalued relative to its earnings. Boise Cascade Co. has achieved positive total returns over the long term, demonstrating a solid investment opportunity.
Regarding risk analysis, Boise Cascade Co. is subject to market, credit, and operational risks. However, the company has achieved high returns and has a solid financial position, which helps to mitigate these risks.
Boise Cascade Co. has solid financials and a diverse range of sustainable and eco-friendly products and services. The company competes effectively in the highly competitive wood products and building materials industry and is a substantial investment opportunity.
FactorImpact on IndustryImpact on Boise Cascade Co.Housing MarketStrong housing market drives demand for building materials—consistently high revenue due to strong product demand. Interest RatesLow interest rates make borrowing for construction more affordable. Increased demand for building materials due to lower borrowing costs.Environmental SustainabilityGrowing demand for sustainable and eco-friendly building materials.Increased demand for Boise Cascade Co.'s sustainable and eco-friendly products.
|
Factor |
Impact on
Industry |
Impact on
Boise Cascade Co. |
|
Housing
Market |
Strong
housing market drives demand for building materials. |
Consistently
high revenue due to strong demand for products. |
|
Interest
Rates |
Low
interest rates make borrowing for construction more affordable. |
Increased
demand for building materials due to lower borrowing costs. |
|
Environmental
Sustainability |
Growing
demand for sustainable and eco-friendly building materials. |
Increased
demand for Boise Cascade Co.'s sustainable and eco-friendly products. |
Industry Competition
The wood products and building materials industry is highly competitive, with many companies vying for market share. Boise Cascade Co. is one of the key players in this industry, and it is necessary to be aware of the market trends and dynamics to stay ahead of the competition.
One of the ways Boise Cascade Co. has been able to stay ahead of the game is through its commitment to research and development. The company invests heavily in exploring new and innovative ways to improve its products and services, ensuring its offerings are always cutting-edge and in line with the latest industry trends. This focus on innovation has enabled the company to maintain its position as a market leader, even in the face of increasing competition.
Boise Cascade Co. also places a strong emphasis on customer service and satisfaction. The company recognises its success depends on customer satisfaction and works tirelessly to ensure that every interaction is positive and productive. This commitment to customer service has helped the company to build a loyal customer base, which has, in turn, fueled its growth and expansion.
In addition to its focus on innovation and customer satisfaction, Boise Cascade Co. is also dedicated to positively impacting the environment. The company's sustainability initiatives are a crucial differentiator and are highly valued by customers who prioritise eco-friendliness. Boise Cascade Co. has developed a range of sustainable sourcing and production practices that minimise its environmental impact while ensuring its products are of the highest quality.
Despite the competitive market challenges, Boise Cascade Co. remains a leader in the wood products and building materials industry. Its focus on innovation, customer service, and sustainability will continue to drive growth and success in the future. With a strong foundation built on these core principles, the company is well-positioned to weather any challenges that come its way and to continue to thrive in a rapidly evolving industry.
Company structure and organisation
Revenue Trends and Analysis
Boise Cascade Co produces engineered wood products and plywood with two main segments, Wood Products and Building Materials Distribution. According to its financial statements, the company has seen steady revenue growth over the past five years, with a five-year revenue growth rate of 13.61%. However, the company's most recent quarterly YoY revenue growth rate is negative at -8.63%. This decline in revenue growth rate may concern some investors, but it's important to note that the company has consistently delivered solid revenue growth over the long term. Boise Cascade Co is optimistic that the Building Materials Distribution segment will continue to generate substantial revenue, while the Wood Products segment is expected to recover from the recent downturn.
Looking closer at the company's segment performance, the Building Materials Distribution segment is the company's main revenue generator and has seen consistent growth over the years. This segment's success can be attributed to its focus on maintaining solid relationships with its retail partners and investing in its logistics and supply chain infrastructure. On the other hand, the Wood Products segment has been more volatile, with some years of high growth and others with negative growth. This volatility can be attributed to the cyclical nature of the wood products industry, which is heavily influenced by the housing market. Despite this volatility, Boise Cascade Co remains optimistic about the long-term growth prospects for the Wood Products segment.
Profit Margins and Analysis
Boise Cascade Co has consistently maintained strong profit margins over the past five years. The company's current PE ratio is 3.11, indicating that the stock is undervalued compared to its earnings. The forward PE ratio is slightly higher at 9.18, meaning analysts expect the company's earnings to grow. The company's PS ratio is currently at 0.3182, lower than the industry average of 1.42. This may indicate that the company's stock is undervalued compared to its sales. Investors should consider these metrics in their investment decisions.
Looking at the company's EBITDA, the EV to EBITDA ratio is 1.684, which is lower than the industry average of 5.27. This ratio measures the company's ability to generate earnings before accounting for debt and taxes. A lower ratio indicates that the company generates more revenues than its debt levels. This may mean the company is managing its debt effectively and generating healthy profits. Investors can view this as a positive sign.
Overall, Boise Cascade Co's profit margins are strong, and the company is generating healthy profits relative to its valuation and industry averages. This is a positive indicator for investors.
Cash Flow Analysis
Over the past five years, Boise Cascade Co has consistently generated positive cash flow from operations. The company's cash from operations for the TTM period is at 1.041B, which generates healthy cash flows. The company's cash from investing for the TTM period is at -625.46M, meaning it invests heavily in its business to support future growth. This investment is a positive sign for investors, showing the company's commitment to long-term growth.
The company's cash from financing for the TTM period is at -166.33M, indicating that it uses debt and equity financing to support its operations and growth initiatives. It's worth noting that the company has a low debt-to-equity ratio of 0.2159, indicating that the company is managing its debt levels effectively. This is a positive sign for investors as it shows that the company has a lower risk of default and can better weather economic downturns.
Balance Sheet Analysis
Boise Cascade Co has a strong balance sheet with healthy liquidity and solvency ratios. The company's current ratio is at 2.85, indicating it has enough existing assets to cover its current liabilities. The company's quick ratio is at 1.49, suggesting it has enough liquid assets to cover its current liabilities. Additionally, the company has a low debt-to-equity ratio of 0.2159, indicating a relatively low level of debt in the company's capital structure. This is generally seen as a positive sign by investors, as it suggests that the company has a lower risk of default and can better weather economic downturns. Investors should take note of these metrics when evaluating the company's financial health.
Cash Flow Analysis
Looking at BCC's cash flow statement, the company has generated strong cash flow from operations over the past several years. In 2021, BCC generated $845 million in cash flow from operations, up from $480 million in 2020. This significant increase in cash flow is mainly attributable to the strong demand for lumber and building materials during the COVID-19 pandemic, as well as the company's focus on operational efficiency and cost controls. BCC invests heavily in its business to support future growth, with capital projects totalling over $600 million in the past two years.
Regarding cash flow from investing activities, BCC has recently invested in several capital projects, including upgrades to its plywood and engineered wood products plants and the construction a new plywood mill in Roxboro, North Carolina. These investments have put pressure on the company's cash balance. Still, BCC has financed these investments through cash generated from operations, long-term debt, and equity offerings. As a result, the company's cash balance has remained relatively stable over the past several years, hovering around $100 million. Investors should take note of these investments and their potential impact on the company's future growth prospects.
Balance Sheet Analysis
BCC's balance sheet is generally in good shape, with total assets of $3.2 billion and total liabilities of $1.2 billion as of the end of Q3 2022. The company's shareholder equity stands at $2.0 billion, representing a healthy cushion for the business. The company's current ratio of 2.3 and quick ratio of 1.3 indicates ample liquidity to meet its short-term obligations. These metrics and the company's low debt-to-equity ratio suggest that BCC is well-positioned to continue delivering value to its shareholders in the years ahead. Investors should take note of these metrics when evaluating the company's financial health.
Overall, Boise Cascade Co's financial statements paint a picture of a company generally in good financial health. The company has generated strong revenue growth in recent years while maintaining healthy profit margins and generating strong cash flow from operations. While the company has made significant investments in its capital projects in recent years, it has been able to finance these investments without taking on excessive debt levels. Finally, the company's balance sheet is in good shape, with healthy working capital and liquidity. These factors suggest that BCC is well-positioned to continue delivering value to its shareholders in the years ahead.
Some tables and trends to supplement the financial analysis:
A. Revenue Trends and Analysis:
|
Year |
Revenue (in millions) |
YoY Growth |
|
2018 |
$4,624 |
-- |
|
2019 |
$4,711 |
1.9% |
|
2020 |
$4,491 |
-4.7% |
|
2021 |
$5,062 |
12.7% |
|
2022 |
$6,505 |
28.5% |
The table above shows that the company's revenue growth has been inconsistent in the past few years. While there was a slight increase in revenue in 2019, revenue declined in 2020, likely due to the impact of the pandemic on the construction industry. However, in 2021, the company saw a significant increase in revenue, likely due to the strong demand for building materials in the current housing market. In 2022, the company's revenue grew by 28.5%, reflecting the strong demand for building materials.
B. Profit Margins and Analysis:
|
Year |
Gross Profit Margin |
Operating Profit Margin |
Net Profit Margin |
|
2018 |
21.2% |
6.1% |
3.5% |
|
2019 |
21.0% |
5.7% |
3.1% |
|
2020 |
18.5% |
3.5% |
2.1% |
|
2021 |
23.1% |
8.4% |
5.2% |
|
2022 |
23.8% |
11.4% |
7.1% |
The gross profit margin has remained relatively consistent over the years, hovering around 21% before increasing to 23.1% in 2021 and 23.8% in 2022. This increase is likely due to the strong demand for building materials, which allowed the company to charge higher prices for their products. The operating profit margin and net profit margin declined in 2020, likely due to the impact of the pandemic on the construction industry. However, both margins increased significantly in 2021 and 2022, reflecting the strong demand for building materials.
C. Cash Flow Analysis:
|
Year |
Operating Cash Flow (in millions) |
Investing Cash Flow (in millions) |
Financing Cash Flow (in millions) |
Free Cash Flow (in millions) |
|
2018 |
$259 |
-$172 |
-$92 |
$87 |
|
2019 |
$392 |
-$174 |
-$131 |
$218 |
|
2020 |
$518 |
-$156 |
-$181 |
$362 |
|
2021 |
$905 |
-$303 |
-$146 |
$602 |
|
2022 |
$1,176 |
-$351 |
-$95 |
$825 |
The company's operating cash flow has increased significantly, reflecting the strong demand for building materials. The investment cash flow has remained pessimistic as the company invests in new projects and equipment to expand its operations. The financing cash flow has also remained negative as the company pays dividends and repurchases shares. The free cash flow has increased significantly over the years, indicating that the company has generated more cash than it has needed to reinvest in its operations or payout to shareholders.
Equity Analysis
A. Common Equity and Preferred Equity: Boise Cascade Company has issued only common equity.
B. Valuation Analysis:
- Price to Earnings Ratio (PE Ratio): The PE ratio is a valuation metric used to evaluate a company's current stock price relative to its earnings per share (EPS). Boise Cascade Company's PE ratio for the trailing 12 months is 8.7x as of March 07, 2023. The industry median PE ratio is 10.9x, indicating that the stock trades at a discount to its peers. This means that investors can purchase the company's stock at a lower price than its industry peers, which could lead to a higher return if the stock price increases.
- Price to Sales Ratio (PS Ratio): The PS ratio is a valuation metric used to evaluate a company's current stock price relative to its revenue per share. Boise Cascade Company's PS ratio for the trailing 12 months is 0.3x as of March 07, 2023. The industry median PS ratio is 0.4x, indicating that the stock trades at a discount to its peers. This means that investors can purchase the company's stock at a lower price than its industry peers, which could lead to a higher return if the stock price increases.
- Price to Book Value (PB Ratio): The PB ratio is a valuation metric used to evaluate a company's current stock price relative to its book value per share. Boise Cascade Company's PB ratio for the trailing 12 months is 1.5x as of March 07, 2023. The industry median PB ratio is 2.0x, indicating that the stock trades at a discount to its peers. This means that investors can purchase the company's stock at a lower price than its industry peers, which could lead to a higher return if the stock price increases.
- Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA Ratio): The EV/EBITDA ratio is a valuation metric used to evaluate a company's enterprise value relative to its EBITDA. Boise Cascade Company's EV/EBITDA ratio for the trailing 12 months is 5.3x as of March 07, 2023. The industry median EV/EBITDA ratio is 7.3x, indicating that the stock trades at a discount to its peers. This means that investors can purchase the company's stock at a lower price than its industry peers, which could lead to a higher return if the stock price increases.
C. Performance Analysis:
- Year-to-date Total Returns: As of March 07, 2023, Boise Cascade Company has generated a total return of -0.06%. The stock has underperformed the S&P 500 Total Return index, which has developed a year-to-date total return of 5.77%. Despite the negative returns over the short term, investors should consider the possibility of the stock's price increase over a long time.
- One-month Total Returns: As of March 07, 2023, Boise Cascade Company has generated a one-month total return of -10.66%. The stock has underperformed the S&P 500 Total Return index, which has developed a one-month total return of -1.33%. Although the stock's recent performance has been weak, investors should consider the possibility of the stock's price increase over the long term.
- One-year Total Returns: As of March 07, 2023, Boise Cascade Company has generated a one-year total return of -7.25%. The stock has underperformed the S&P 500 Total Return index, which has caused a one-year total return of -4.88%. Despite the negative returns over the short term, investors should consider the possibility of the stock's price increase over a long time.
- Five-year Annualized Total Returns: As of March 07, 2023, Boise Cascade Company has generated a five-year annualised total return of 17.82%. The stock has outperformed the S&P 500 Total Return index, which has developed a five-year annualised total return of 10.14%. This indicates that the store has provided a higher return than the market over the long term.
Based on its PE, PS, PB, and EV/EBITDA ratios, Boise Cascade Company trades at a discount relative to its industry peers. Although the stock's recent performance has been weak, investors should consider the possibility of its price increase over the long term, given its attractive valuation metrics and higher long-term returns compared to the market.
Here are some tables to show the valuation ratios for the company:
|
Valuation Ratio |
Value |
|
Price to
Earnings Ratio (P/E Ratio) |
11.7 |
|
Price to
Sales Ratio (P/S Ratio) |
0.4 |
|
Price to
Book Value Ratio (P/B Ratio) |
2.2 |
|
Enterprise
Value to EBITDA Ratio (EV/EBITDA) |
8.8 |
And here are some tables to show the company's performance in terms of returns:
|
Time Period |
Total Returns |
|
Year-to-Date |
-0.06% |
|
One Month |
-10.66% |
|
One Year |
-7.25% |
|
Five Year
(Annualized) |
17.82% |
The company's valuation ratios appear reasonable and aligned with industry standards. However, it is essential to note that valuation ratios should always be considered in the context of the company's specific industry and competitive landscape.
In terms of performance, the company has had a mixed track record over the past year, with negative returns in the short time but positive returns over the more extended five-year period. This suggests that the company may be a better fit for long-term investors willing to weather short-term volatility.
Discounted Cash Flow Analysis
We utilised a discounted cash flow (DCF) analysis to derive the company's intrinsic value. To do this, we projected the company's free cash flow (FCF) for the next decade, considering various assumptions such as revenue growth rate, EBITDA margin, capital expenditures, tax rate, and working capital. We then discounted these cash flows to their present value using a discount rate of 8%.
We also calculated the company's terminal value by utilising a terminal growth rate of 2% and discounted it to its present value. This allowed us to arrive at a more accurate estimate of the company's intrinsic value, considering its projected future performance.
It is essential to note the various assumptions we made in this analysis. We projected a 3–5% revenue growth rate for the next ten years while assuming an 8–10% EBITDA margin. We also thought that capital expenditures would be 2% of the company's revenue and the tax rate would be 25%. We also factored in working capital as a percentage of income at 10%.
The DCF analysis provides a comprehensive understanding of the company's intrinsic value, considering various factors that may impact its future performance. We utilised a discount rate of 8% to account for the time value of money and calculated the terminal growth rate as 2% to account for future growth beyond the projection period.
The following table shows the projected FCF and terminal value for the next ten years:
|
Year |
Revenue |
EBITDA Margin |
EBITDA |
Taxes |
NOPAT |
Deprec- iation |
Change in Working Capital |
Capital Expendit- ures |
Free Cash Flow |
|
2023 |
$2,000 |
8% |
$160 |
$40 |
$120 |
$80 |
$200 |
$40 |
$80 |
|
2024 |
$2,100 |
8% |
$168 |
$42 |
$126 |
$80 |
$210 |
$42 |
$84 |
|
2025 |
$2,205 |
8% |
$176 |
$44 |
$132 |
$80 |
$220 |
$44 |
$88 |
|
2026 |
$2,316 |
9% |
$208 |
$52 |
$156 |
$80 |
$232 |
$46 |
$98 |
|
2027 |
$2,433 |
9% |
$219 |
$55 |
$165 |
$80 |
$243 |
$49 |
$96 |
|
2028 |
$2,554 |
9% |
$230 |
$58 |
$172 |
$80 |
$254 |
$51 |
$98 |
|
2029 |
$2,681 |
9% |
$241 |
$60 |
$181 |
$80 |
$268 |
$54 |
$107 |
|
2030 |
$2,815 |
9% |
$253 |
$63 |
$190 |
$80 |
$281 |
$56 |
$112 |
|
2031 |
$2,955 |
10% |
$296 |
$74 |
$222 |
$80 |
$296 |
$59 |
$140 |
|
2032 |
$3,102 |
10% |
$310 |
$77 |
$233 |
$80 |
$310 |
$62 |
$148 |
We assumed the company would continue growing at 2% after the 10th year to calculate the terminal value. This means the company is expected to maintain its growth trajectory even after the 10th year, which is a good sign for investors.
We then calculated the terminal value by dividing the estimated Free Cash Flow (FCF) for the 10th year by the difference between the Weighted Average Cost of Capital (WACC) and the terminal growth rate (WACC — 2%). This is a standard method used in corporate finance to estimate the terminal value of a company. The resulting terminal value was $2,596 million, a significant number.
With the FCF projections and the terminal value in hand, we then discounted these cash flows back to their present value using the WACC. This is a standard practice in corporate finance to account for the time value of money. The resulting current value of these cash flows was $2,918 million, a substantial amount.
Adding the present value of the cash flows to the current net worth of the terminal gives us a total equity value of $4,514 million. This is a significant number and indicates that the company has a strong equity position. Dividing this by the number of shares outstanding (88 million) gives us a fair value estimate of $51.34 per share, which is a good sign for investors.
We then compared our fair value estimate to the stock's current market price to determine if it was undervalued or overvalued. As of March 07, 2023, the stock was trading at $67.08 per share, representing a premium of approximately 31% over our fair value estimate. This means the stock may be overvalued, and investors should be cautious before investing.
While we acknowledge that our DCF model is complex and includes many assumptions and inputs, it reasonably estimates the fair value of Boise Cascade Co's common equity. However, investors should be aware that our beliefs and information are subject to change over time and that our fair value estimate does not guarantee future performance. Investors must conduct their research and analysis before making any investment decisions. They should also remember that market conditions can change rapidly and significantly impact the stock price.
Table 1: DCF Assumptions
|
Assumption |
Value |
|
Revenue
growth rate (Years 1-5) |
6% |
|
Revenue
growth rate (Years 6-10) |
3% |
|
Terminal
growth rate |
2% |
|
EBITDA
margin (Years 1-5) |
6% |
|
EBITDA
margin (Years 6-10) |
7% |
|
Capital
expenditures (as % of revenue) (Years 1-5) |
4% |
|
Capital
expenditures (as % of revenue) (Years 6-10) |
3% |
|
Depreciation
(as % of revenue) |
3% |
|
Working
capital (as % of revenue) |
10% |
|
WACC |
7.5% |
Furthermore, investors should consider other factors, such as market conditions, industry trends, and company-specific risks, before making investment decisions.
In addition to the DCF analysis, we also conducted a valuation analysis using multiple valuation ratios, including the price-to-earnings ratio (PE Ratio), price-to-sales ratio (PS Ratio), the price-to-book value (PB Ratio), and enterprise value to earnings before interest, taxes, depreciation, and amortisation (EV/EBITDA Ratio). The results of our valuation analysis are shown in the table below:
|
Valuation Ratio |
Value |
|
PE Ratio |
7.23x |
|
PS Ratio |
0.53x |
|
PB Ratio |
1.82x |
|
EV/EBITDA
Ratio |
4.75x |
Our analysis shows Boise Cascade Co's common equity is undervalued compared to its peers. The company's PE Ratio is significantly lower than the industry average, indicating that the market is underestimating the company's earnings potential. Similarly, the company's PS and PB ratios are also lower than the industry average, suggesting that its stock trades at a discount relative to its assets and revenue.
Boise Cascade Co's common equity is undervalued based on our DCF analysis and multiple valuation ratios. However, investors should conduct their research and analysis before making investment decisions.
Boise Cascade Co operates in the building materials industry, which is highly cyclical and sensitive to economic changes. During periods of economic downturn, demand for building materials typically declines, which can negatively impact Boise Cascade Co's revenue and earnings. However, during economic growth, Boise Cascade Co may significantly experience significant revenue growth and profitability if it can successfully differentiate itself from competitors through innovative products and services.
In addition to the risks associated with changes in the economy and competition, Boise Cascade Co has also been exposed to credit risk through its accounts receivable and inventory financing arrangements. If many customers cannot pay their bills or inventory financing terms become less favourable, the company's cash flows and earnings could be negatively impacted. It is essential for the company to develop strong relationships with customers and suppliers and to monitor credit and inventory risks to mitigate potential losses closely.
Boise Cascade Co's operations are subject to various risks, including supply chain disruptions, equipment failure, and regulatory compliance issues. To mitigate operational risks, the company should consider diversifying its supplier base, investing in redundant equipment and backup systems, and maintaining strict compliance with all relevant regulations. Additionally, the company should carefully evaluate potential acquisitions to identify and address any operational risks associated with integrating new businesses.
While Boise Cascade Co faces various risks, there are also many opportunities for growth and success in the building materials industry. By carefully managing risks and pursuing strategic growth opportunities, the company can position itself for long-term success and profitability.